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Nigeria Strategy Report H1 2019 Excerpts - Monetary Policy - Maintaining the Narrative

• In this session, we continue discussion with the domestic section of our core strategy document – the Nigeria Strategy Report. In this piece, we look at the major themes that dominated monetary policies in Nigeria over 2018 and delineate our outlook for CBN’s monetary stance over 2019.
• In our H2 18 strategy outlook, we outlined our expectation for a halt in the downtrend in OMO rates as apprehension towards budding system liquidity and capital reversal threatens FX stability. Over the second half of the year, the apex bank had to grapple with significant system liquidity over the period and contend with capital reversals over the same period. For context, OMO maturities over H2 (N9.3 trillion) were 116% higher compared to H1 18. In response to the higher maturity and its attendant impact on the naira, the CBN towards the latter part of the year was forced to increase its liquidity squeeze over the period and raise the OMO rates. Accordingly, interbank rates tracked higher particularly in the last quarter of the year with both OBB and Overnight rates climbing higher to 14.79% (+5.9pps) and 16.06% (+6.3pps).
• Going into 2019, despite our expectation for inflationary and currency pressure towards the latter part of the year, we believe the CBN will stick to keeping its benchmark rate unchanged as the monetary authority will continue to balance between economic growth and price stability. Irrespective, as a sign of showing monetary tightness to rein the uptick in inflation over the second half of the year and attract FPIs, we believe the CBN will opt for an increase in the marginal clearing rate at its OMO auctions. To add, the apex bank is set to contend with an elevated liquidity profile over 2019. Specifically, a total of N16.0 trillion is expected to mature in the year with a larger chunk to mature in H2 19. Consequently, we believe the CBN will adopt a tough stance in combating the excessive liquidity from the system. Ultimately, we expect the CBN to jack up rates at its OMO auctions over H2 19 where the pressures are expected to surface. Particularly, we expect OMO rates to average 13.7% over H1 19 and go higher to 14.7% over H2 19. Furthermore, the tenure of the present CBN governor in June 2019 signals a no change policy as a new governor would be wary to move the needle while assessing economy growth and price stability over the second half of the year. On the same thought, if the present governor is re-appointed, we do not anticipate any change to his current stance.