The Monetary Policy Committee (MPC) held its first meeting for the year on the 3rd and 4th of April following the recent confirmation of two new Deputy Governors of the CBN (Mrs. Aisha Ahmad and Mr. Edward Adamu) and three Independent MPC members (Prof. Adeola Adenikinju, Dr. Aliyu Sanusi and Dr. Robert Asogwa). In line with consensus expectation for a “rate hold”, the Committee unanimously voted to maintain rates at previous levels, bucking a trend of policy rates cuts by African central banks in recent weeks. The regional easing cycle has seen Kenya (-50bps to 9.5%), Ghana (-200bps to 18.0%) and South Africa (-25bps to 6.5%) ease benchmark rates in their last meetings, raising speculations of a possible rate cut by the Nigerian MPC, prior to the meeting, after successfully anchoring near-term inflation expectation lower. The CBN however decided 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 around the MPR at +200 and -500 basis points.
In arriving at its decision, the CBN, in the communique released after the meeting, acknowledged the progress made in recent times in stabilizing the FX market and anchoring inflation expectation lower; nonetheless, the Committee, on a balance of factors, decided to maintain status quo, arguing that a policy rate cut, while beneficial to growth, might negatively impact external account and generate FX and Consumer price pressures. The Committee admitted the need to support growth - currently running below trend and long term potential - and buoy private sector credit growth (up a paltry 5% YTD in February).
Similarly, MPC maintained that the CBN will continue to adopt unconventional monetary policy, interpreted as targeted developmental intervention in specific sectors such as the anchor borrowers’ programme, to aid credit flow to vulnerable but growth enhancing sectors of the economy. The MPC also noted that recent fiscal policy actions such as inauguration of Food Security Council, efforts to pay off contractor debts with issuance of promissory note and passage of the 2018 budget will be required to improve food sustainability, support financial system stability and aid the much-needed economic growth.
Our Views… Possible Implications and Outlook
Although the MPC’s decision was largely in line with forecast, we believe policy rate cut in 2018 is a matter of when, not if, against the backdrop of;
1. Supportive external account condition – stable oil prices, rising current account surplus and external reserves – which empirical studies have emphasized to be the major anchor of monetary policy. The key downside risks to external account stability are “sudden stops “and high probability of capital flow reversals as the 2019 election season draws near; yet, we think the CBN has enough external reserves and resolve to defend the currency.
2. Benign outlook for consumer prices, which the CBN Governor has repeatedly highlighted to be a major policy consideration. With persistent deceleration of Inflation rate, the case for easing will become more compelling in H2:2018. Afrinvest Research forecasts year-end inflation at 11.4%.
Although we expect a rate cut in 2018, the impact on fixed income yields might not be substantial as the CBN has already set in motion the easing cycle by deliberately guiding market rates down in the past 6 months, in addition to knock-on effect of the FGN fiscal strategy to reduce domestic debt issuance. Against this backdrop, Nigerian fixed income market has performed fairly year-to–date; the ACCESS Bank FGN bond index is up 1.8% YTD as bond yields have declined 44bps on average to 13.6% while T-bills rates have compressed 109bps in the primary market in the same period. However, our outlook continues to favour lower yields, albeit gradual, with short to intermediate bonds falling faster than longer term bonds as the yield curve gradually normalizes.
On the equities side, we anticipate modest performance as we have continued to witness moderate participation of foreign investors with policy normalization in systemic central banks and the pull back of domestic investors (accounting for 58.8% of market activities as at Feb-2018). Nevertheless, as the yield environment is expected to gradually taper through the year, equities will likely become more attractive especially as quarterly earnings improve securities valuations.