MPC: Policy Parameters Unchanged as Fears of More Hawkish Stance Soften

As we expected in our Pre-MPC note, the Monetary Policy Committee (CBN) of the Central Bank of Nigeria (CBN) retained all policy rates during its last meeting for the year which held this week. The eleven members of the MPC in attendance unanimously voted to maintain Monetary Policy Rate (MPR) at 14.0% with the asymmetric corridor of +200bps/-500bps, Cash Reserve Ratio (CRR) at 22.5% and Liquidity Ratio (LR) at 30.0%.

While these decisions were consistent with the outcome of all meetings since July 2016, the unanimous vote was surprising. The sentiments of members had recently shifted towards further tightening as observed in the previous two meetings. For instance, three members voted for a 25bps increase in MPR and another three suggested a 150bps hike in CRR as at September while two members suggested a rate hike in the July Meeting. We suspect that the Bank’s moderate economic growth forecast of 1.75% in 2018, lower than IMF’s 1.9% and Afrinvest’s 2.1% growth estimates, prompted this stance. Furthermore, we observed that the tone of the Apex Bank’s policy announcements slightly softened and tilted towards growth rather than the usual focus on stable capital flows and price stability. On a related note, the committee expressed worry about the slow expansion in credit to the private sector which we believe is reflected in soft spending by consumers and businesses. Given that low credit to the real sector led to the recently proposed dynamic CRR framework and the corporate bond repurchase programme, we are surprised that there was no statement on the progress so far.

In the short-term, the committee emphasised that the risks to the Nigerian economy remain closely related to global and domestic events. Globally, high interest rates in advanced economies, lower oil prices and the trade war between the US and China which could prompt slower growth are prominent concerns. Domestically, low fiscal buffers, elevated insecurity and the lack of progress in resolving structural deficiencies are confounding issues. Overall, we mostly align with the stance of the MPC in this meeting, but we worry that there could be a resurgence in FX demand management; this can potentially restrict imports, fuel inflationary pressures as goods become scarce and ultimately constrain growth.

Moving forward, we expect the CBN to continue to manage system liquidity to guide desired rates in the fixed income market. While this may be insufficient to stem capital flow reversals ahead of the elections, the recently issued US$2.8bn Eurobonds provide additional buffers for the CBN to sustain FX sales and, in turn, exchange rate stability in the near-term.

Inflation Rate Surprisingly Moderates to 11.26% in October 2018
On Wednesday, the National Bureau of Statistics (NBS) released the October Inflation report which showed an unexpected moderation in inflation to 11.26% Y-o-Y (September 2018: 11.28%). The consensus expectation had been a soft increase in inflation rate in line with the trend observed in the past two months where a low base had lifted headline inflation. However, the slowdown in headline inflation in October was mainly due to a stronger deceleration in Month-on-Month (M-o-M) inflation to 0.7% from 0.8% in the previous month. This is the fourth consecutive moderation in M-o-M inflation and we attribute this to a slower rise in food prices due to higher food supplies from crop harvests. Indeed, food inflation slightly moderated to 13.28% Y-o-Y (September 2018: 13.31%) and M-o-M food inflation was lower at 0.8% (September 2018: 1.0%). Meanwhile, core inflation turned after eight months consecutive slowdown as it was higher at 9.9% Y-o-Y (September 2018: 9.8%) – although it is slightly comforting that it remained below double-digits. The rise in core inflation was attributed to higher energy and transportation costs.

Supply-side Factors to Drive Inflation in Nigeria
In the next months, prices may resume an uptrend given festive and pre-election spending, but we believe the threat of both factors will be moderate. However, we believe lower food supplies as the harvest season gives way may pose more threat to inflation going forward. This is consistent with our views that inflation trends in Nigeria are more responsive to supply shocks than an expansion in money supply. In fact, the measures of money supply being tracked by the MPC have underperformed estimates for the year. Instead, elevated headline inflation has been driven by factors such as insecurity in the North-Central and flooding which have affected food prices, as well as high transportation and energy prices.  We note that policies to resolve these issues and to ensure ease of doing business are within the control of policymakers on the fiscal side.