MPC to Maintain Status Quo… Near Term Outlook Favours Easing

The Monetary Policy Committee (MPC) is set to convene for the sixth and final time this year on the 20th and 21st of November. The meeting is coming against the backdrop of a synchronised global growth expansion – underlying recent moves by systemic central banks to begin phasing out ultra-accommodative monetary policy hitherto put in place to buoy growth – rising commodity prices and improving domestic macroeconomic conditions anchored by recovery in external sector variables. Despite the noticeable easing of external sector pressures and improving growth prospect, we believe that in line with outcomes of previous meetings held this year, the MPC would retain rates at current level, owing to the fragility of the economic recovery and disappointing inflation numbers witnessed so far in Q3:2017. Our considerations are below.

Global Markets & Policy Environment Remain Favourable Despite Headwinds
Global markets have been on a bullish run since the last MPC meeting as asset prices continue to rally in the wake of improved global growth expectations and surging commodity prices. Oil prices have maintained upward momentum since September as markets remain confident on near term rebalancing of the oil market. OPEC and Non-OPEC countries are scheduled to meet at the end of the month with the expectation being a unanimous decision to extend production cuts. Prices have further been buoyed by rising tensions in the Middle East as well as the anti-corruption drive by Crown Prince Mohammad Bin Salman leading to the arrest of key government officials, royalty and prominent business leaders in Saudi Arabia. These factors have culminated in a 13.2% increase in the benchmark Brent Crude price to $62.82 (14/11/17) from $55.48/b as at when the last MPC meeting was held.

Whilst the recent rally in oil prices is expected to have a positive knock-on impact on fiscal and external sector balance of oil exporting countries including Nigeria, we note that increasing odds of monetary policy tightening by systemic central banks – the Bank of England (BOE), Bank of Japan (BoJ), European Central Bank (ECB) and the US Fed – constitute an headwind to asset prices and macroeconomic stability in emerging and frontier markets.

In a sign of things to come, the BoE, on 2nd November, recently ignored Brexit uncertainties to raise its benchmark rate for the first time in a decade to 0.5% while the ECB also recently unveiled plans to halve its monthly bond purchase programme to 30bn from January 2018. In the U.S., doubts over a potential rate hike over inflation fears were quelled as the US Fed received encouragement from recent inflation report- Consumer Price Index rose 0.2% M-o-M and retail sales were higher than predicted at 0.2% M-o-M. Nonetheless the downside risk of rising global interest rates, we expect external policy and market environment to remain broadly favourable for emerging and frontier markets in the short to medium term as the pace of tightening is expected to be gradual whilst most major central banks are increasingly utilizing forward guidance communication to shape market expectation and reduce volatility.

Mixed Domestic Signals Justify Maintaining Status Quo
The CBN has recorded remarkable gains since the start of the year in FX stability - one of its major policy objectives and indeed the prime monetary policy anchor in the last 3 years. Although the rebound in oil exports in Q3:2016, which has had a positive impact on current account and external reserves, marked a turning point in macroeconomic stability, pro-market moves made by the CBN, particularly the opening of the Investors and Exports Window in April, has consolidated the gains in the FX stability with the Naira appreciating in all segments of the market since the last meeting.

However, the same could not be said of the other policy objective – price stability. With the impact of high-base effect on CPI growth now exhausted, sticky inflation results have left near-term Inflation outlook unchanged since the last meeting. Headline inflation slightly moderated from 16.0% Y-o-Y recorded in August to 15.9% Y-o-Y in October although M-o-M price growth declined 21bps to 0.8% in the same period. Food Inflation, currently at an 8-year high of 20.3%, has been the main pressure point against the backdrop of elevated price of Farm Produces and Imported Food items. Core inflation on the other had has declined from 17.9% at the start of the year to 12.1% in October, aided by high-base effect as well as recent moderation in M-o-M price growth.

The NBS is due to release Q3:2017 GDP report on Monday and we expect growth to accelerate to 2.7% in the Quarter (from 0.55% in Q2:2017) – driven by rebound in oil production and nascent recovery in the Non-Oil sector which disappointed in Q2. Even as we expect an expansion in growth, the slow pace of the recovery coupled with the feedback effect of high interest rate environment on debt sustainability vis-à-vis favourable external sector variables are considerations dovish members of the committee will highlight to justify a rate cut.

However, we do not expect the rate cut next week as Headline Inflation is still far off from the target range of 7 – 9% and above the benchmark policy rate (14.0%). Hence, we expect the conclusion of the 6th MPC meeting would be to:

  • Retain the MPR at 14.0%;
  • Retain the CRR at 22.5%;
  • Retain the liquidity ratio at 30.0% and
  • Retain the Asymmetric corridor at +200 and -500 basis points around the MPR.

We, however, note that near term outlook still favours easing as guided by the CBN Governor in recent comments. Investors are already pricing this expectation into valuation of debt securities, with average bond yield down 110bps since January 2017. We believe there is still scope for more rally in the Fixed Income market as we expect the CBN to cut its benchmark rate in Q2:2018.