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Monetary Policy: MPC Springs a dovish surprise

• The CBN Monetary Policy Committee (MPC) voted to cut the key benchmark interest rate by 50bps to 13.5%, taking the Standing Lending Facility and standing deposit facility to 15.5% and 8.5% respectively. The decision was surprising in that ARM Research and most analysts surveyed by Bloomberg anticipated no change in policy parameters. The MPC also switched its policy stance to ‘easing’ from ‘neutral’, which was a majority decision. What’s more amazing though is the sharp swing in the policy perception within the MPC members. Until yesterday’s meeting, majority of the members expressed caution on exchange rate stability and inflation and advocated for a neutral stance in the last four (4) meetings noting the risk to price and currency stability. Yesterday, 9 out 11 members voted for a rate cut, though only 6 members voted for a 50bps rate cut.
• In the justification for a rate cut, the committee expressed satisfaction with the relative stability in the price level and exchange rate, and thus sought to support growth. Particularly, following the calm outcome of the general election together with the recent resurgence of foreign portfolio investment into the country and continued deceleration in inflation reading, the CBN thought it imperative to signal a new direction.
• FX and Price Stability provided the headroom: After a tumultuous end in 2018 following spate of capital repatriation and paucity of flows, the foreign exchange market took a breather over Q1 2019 with a rebound in foreign portfolio inflows. Total FPI inflow over the period expanded 3x QoQ and 47% YoY to $7.6 billion (which on average accounts for 88% of total foreign inflows), far higher than total inflows over the second half of 2018. Consequently, the intervention by the CBN shrank to $1.2 billion compared $3.6 billion in Q4 18, with a slight depletion in the external reserve by $540 million in Q1 19 ($2.9 billion in Q4 18). On consumer prices, we have seen relative improvement in the first two months of 2019 with inflation rate moderating by 7bps MoM, relative to an average increase of 9bps over the last two months in 2018. Clearly, the downtrend in energy and food prices played a major role in driving the moderation observed thus far.
• Will the cut really support growth? Although the MPC anchored its decision on the need to support growth by way of encouraging credit flow to the productive sectors of the economy, we hold a different view on the impact on bank lending. Our view is based on the inelastic nature of bank’s lending rate to the benchmark rate. For context, despite MPR staying unchanged over the past two years, we have seen DMBs reprice their loan rates according to prevailing fixed income yields. Furthermore, a 50-bps cut to the average prime lending rate (16.05%) appears insignificant. We reckon that for the MPR to drive growth as anticipated by the MPC, the CBN will have to do more in lowering the OMO rates with a transmission into effective yields on other treasury assets. As such, if the MPC really follows through on its second mandate of supporting growth, we do not rule out the possibility of a further cut in the near term and a faster cut in subsequent OMO rates.

 

Foreign inflow to the IEW reached a record high of $3.7 billion in February