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Monetary Policy Decision - MPC holds rates in nod to sticky inflation

MPC holds rates in nod to sticky inflation                                                                           

At its penultimate meeting of 2017, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to hold all key monetary policy tools at their previous levels. Specifically, in line with Vetiva and Consensus expectations, the committee maintained the monetary policy rate (MPR) at 14.0% . The MPC highlighted stubborn 2017 inflation (January: 18.7% y/y; August: 16.0% y/y) and delicate gains made in the foreign exchange market (FX) as significant deterrents to loosening monetary policy and addressing the high cost of capital in the economy. In our view, the “HOLD” decision shows an appreciation of the reality that the best course of monetary policy action is to “do no harm” in the interim, preserving FX market gains and permitting the effects of fiscal stimulus to permeate the economy.                                                                           

The committee suggested that it would monitor the evolution of key economic indicators – GDP growth, inflation, FX – between now and Q2’18 as it considers adjustments to its current policy stance. Whilst this does not suggest that the MPC would wait until its May or July 2018 meeting to alter policy rates, it is strongly suggestive of another “HOLD” decision at the final MPC meeting of the year in November, in line with our view. We expect sticky inflation (on account of food prices) and the expected Federal Reserve rate hike to dissuade any change in monetary policy stance until 2018.