EUR 9.24 For Business Accounts Only

MPC meeting preview: Motionless MPC on the cards

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Elevated CPI and persisting FX concerns favour a retention of status quo: On the domestic terrain, inflation readings remain elevated as fresh shocks to food prices owing to higher cross border purchases added to subsisting pressures from higher YoY fuel and electricity prices. On the currency front, the mirage at the interbank continues, with the NGN holding firm at N305/$—unchanged from the last MPC, though liquidity metrics at the segment dwindle further (Q4 16: -34% QoQ to $10.3billion) and parallel market premium continues to widen (+10pps to 63%). Though FX reserves recently climbed to a ten-month peak of $27.4 billion, the rise stemmed from a $2.3 billion inflow from ‘other official receipt’ and $1.4 billion swap inflows in late Q4 16.

Growth concerns and fiscal reflation to remain on the back bench: As with 2016 when the apex bank, citing structural impediments to growth which require fiscal remedies, ignored the sharp deterioration in growth picture as the economy went into recession, we see limited prospects for a turnaround. Notably, while FG has embarked on fresh attempt at economic reflation with a larger domestic borrowing plan (+47% YoY to N1.25 trillion), which presumably drove higher bond and NTB issuance thus far in January 2017^[1], CBN has net issued N483 billion MTD at elevated marginal clearing rates of 18.3%. The still hawkish CBN stance on yields implies the apex bank still views its stated objective of price stability as superior to the need for an accommodative monetary stance in lock-step with the expansionary fiscal thrust. Accordingly, whilst we think the largely cost-push nature of current inflationary pressure requires less dogmatic orthodoxy in monetary policy, we see CBN’s focus on CPI and currency as well as developments on the global landscape as favouring a retention of the currently tight stance.

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[1] MTD, FG has net issued N136billion in NTBs and N215 billion in bonds.