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Monetary Policy Decision - MPC Maintains Status Quo Into 2019

MPC maintains status quo into 2019                                                                      

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) closed 2018 by maintaining the status quo as all eleven attending committee members voted to hold policy levers at their previous levels. Although we anticipated the “HOLD” decision, we are surprised by the unanimity at today’s vote considering three members opted to hike the monetary policy rate by 25bps in September. In particular, fears over near-term inflation and pressure on the exchange rate (FX) had convinced Adeola Adenikinju to “marginally adjust rates upwards as a strong anti-inflation signal” while Aliyu Sanusi considered an early MPR hike as “optimal forward-looking monetary policy”. Presumably, these fears have been assuaged by recent reticent inflation (sticky around average of 11.3% y/y in last 6 months) and a healthy CBN external reserves picture.                                                                  

CBN Governor Godwin Emefiele was quick to emphasize that the HOLD decision was not a passive choice but an “expression of confidence in policy choices made so far in light of recent improvements in inflation and the economy”. Revealing a 2018 GDP growth projection of 1.75% y/y (Vetiva: 1.74% y/y), the CBN reiterated the same challenges to near-term economic resilience. On the external front, divisive Brexit negotiations, oscillating oil prices, a burgeoning trade war, and continuing monetary policy normalization all create an unwelcome backdrop for the Nigerian economy. On the domestic front, the apex bank Governor highlighted weak financial intermediation, low fiscal buffers, and reduced foreign inflows as key threats.                                                                           

In our view, given the trend of rising global interest rates and depreciating emerging market currencies, the CBN would most likely encounter the monetary trilemma problem in 2019. So far, the apex bank has opted to use its reserve buffers to support the naira (and counter capital flight), but larger than expected depreciation pressure on the naira or poorer than expected reserves performance could force the CBN to hike interest rates to support the naira, a more likely outcome than the third option of floating the currency.