FREE

Monetary Policy Decision - MPC holds rate but shows hawkish leaning

In line with market expectations, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) maintained all monetary policy levers at their previous levels. This particular meeting comes hot on the heels of a two-day liaison between the CBN and fiscal authorities to discuss a harmonized approach to delivering on the recently released Economic Recovery & Growth Plan (ERGP). Voting 9 to 1 to hold policy rates, the MPC cited rising month-on-month inflation and elevated foreign exchange (FX) demand as dominant factors in their decision. We are not surprised by this decision as the recent U.S. Federal Reserve rate hike and uncertainty over the OPEC-Russia oil output deal, as well as sticky inflation, temper any intention towards looser monetary policy.

Inflation is key for monetary policy outlook. Base effects have only started kicking in and will weigh harder by May, but m/m inflation must slow for inflation readings to significantly improve. Conventional monetary policy tools have proven largely ineffective at stemming this tide, further shown by the MPC’s unwillingness to further tighten despite inflation lying substantially above the target band. Therefore, interventions will be crucial. Specifically, continued intervention in the FX market to strengthen the naira in the parallel market and boost dollar liquidity, and intervention in the agriculture sector to moderate the rise in food prices.

Developments on the oil front will be closely watched as this will partly determine the level of CBN’s available ammunition. We remain mildly bullish on this issue, at least for the first half of 2017. As per the Governor’s comments, the MPC remains expectant of fiscal and supply-side stimulus to spur recovery. However, hitches in implementing the ERGP e.g. through a delayed passage of the 2017 Budget, may yet again induce pressure on the MPC to turn their attention towards stimulating economic growth.