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Monetary Policy Decision - Inflation expectations drive MPC Hold call

At its second meeting of the year, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) opted to hold all monetary policy levers at their previous levels, a move we had earlier predicted and in line with Consensus expectations. Despite the c.290bps moderation in headline inflation so far in 2018 and a stronger case for spurring economic growth on the back of weaker-than-expected Q1’18 GDP growth numbers, the committee persisted with the status quo. The primary reason for this is a growing concern over future inflation, highlighted by the fact that one committee member voted to hike interest rates by 50bps – the first tightening vote since March 2017, with the remaining eight voting to hold rates.

We see this decision as positive for the Nigerian economy as it would support further disinflation and stability in the foreign exchange market, both of which should provide a good base for economic growth. Meanwhile, the emphasis on H2’18 inflation at this month’s meetings gives us clear guidance on CBN thinking and helps us chart the monetary policy path for the rest of the year. Specifically, we do not anticipate any scope for the MPC to lower interest rates in the coming months unless the outlook for impending fiscal injections changes. Considering the size of the 2018 Budget (₦9.1 trillion), high oil prices which drive up FAAC allocations, and the political reality of a pre-election year, we do not foresee any change here and as a result, posit that the MPC would maintain monetary policy status quo for the rest of the year.