MPC Preview: Policy trade-off still favours no change
- As the MPC commences a two-day policy meeting today, we expect majority of its members to vote to keep monetary policy unchanged. This decision will be aided by the body’s zero tolerance for price and exchange rate volatility which has subsisted in the last few months.
- Despite improved economic fundamentals, we expect the MPC to remain cautiously optimistic and not to put a shade on the modest stability seen in the FX market thus far. For context, our view is premised on MPC’s surmise on the strong relationship between recent FX market gains and Nigeria’s slowly recovering economy.
- In addition, sustained pressure on MoM food inflation is likely to drive a retention of current hawkish policy stance—with recent floods set to impact Q4 inflation numbers. In any case, with average inflation still over 16% YTD, subsisting negative real return on investment should provide further support to the apex bank.
- Farther out, given the fragile pace of real GDP growth, subsisting CA surplus position and expected downtrend in inflation, we expect the MPC to switch to an accommodative monetary policy stance in H1 2018.
- Recent cessation of the one-year OMO paper and gradual reduction in clearing rates at OMO auctions suggest the CBN is edging closer to an inflection point policy wise, if one goes by historical patterns. Thus, in the interim, we expect the CBN to assume a less aggressive stance at its OMO windows to continue to drive rates lower till our H1 2018 call plays out.
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