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NSR H2 2019 Excerpts - Monetary Policy - Unorthodox policies to dominate

• In this cut-out of our core strategy document – The Nigeria Strategy Report, we look at the major themes that dominated monetary policies in Nigeria over H1 2019 and delineate our outlook for CBN’s monetary stance over the rest of 2019.
• In our H1 2019 outlook, we projected a downtrend in marginal clearing rate at OMO auctions over H1 19 on the back of dissipating inflationary pressure, FX stability and lower system liquidity with the monetary authority expected to hold on to the benchmark rate. In line with our expectation, marginal clearing rate moderated 252bps over the first half of the year. However, the MPC sprouted a surprise at its second meeting for the year cutting the symbolic benchmark rate by 50bps. Putting into perspective, after net issuing N2.6 trillion in OMO bills over the first three months of the year, the CBN receded in its sterilization with net issuances plummeting to N835 billion over Q2 19.
• Over the rest of the year, we expect concerns on economic growth to dominate the monetary authority actions with an eye kept on inflation movement and FX stability. We see inflationary pressure dissipating over the rest of the year, while our outlook for the naira suggests a stable movement in the currency. Elsewhere, though recent body language of the monetary authority suggests a loosening given its predilection on stimulating economic growth, we however think the MPC would take a prolong pause over the rest of the year. Our view reflects the monetary authority’s concern on a possible liquidity build up should loosening drive growth in consumer credit without proportionate adjustment in aggregate output. Specifically, we can’t rule out a formalized restriction or cap of DMB’s participation in CBN’s auctions. Meanwhile, we believe the apex bank will opt for a slight increase in the marginal clearing rate at its OMO auctions towards the latter part of the year (Q4 19). Our view reflects expected high system liquidity coming from maturities over Q4 19 combined with the CBN’s stance of avoiding speculation on the naira. Nonetheless, given that the apex bank is under less pressure relative to same period last year where the CBN was embattled with elevated system liquidity, surge in repatriation of foreign investments caused by higher yields in advanced economies and pre-election concerns, we see scope for a modest uptick in OMO rate between 12.5% and 13.5% by the end of the year.