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Monetary Policy Decision - MPC maintains tight stance at start of 2017

• In line with Vetiva and Market expectation, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to retain all monetary policy levers at their previous levels at the end of the first meeting of 2017. The decision is a nod to the fact that wider economic conditions have been quite static since the last MPC meeting of 2016. In his speech, the CBN Governor Godwin Emefiele reiterated certain key considerations, namely; the limitation of monetary policy at adequately tackling the problem of stagflation, the need for speed on the fiscal front, and preservation of foreign exchange (FX) for priority sectors of the economy. We interpret the comments as a restatement of the previous stance of the monetary authorities with regards to interest rates and exchange rate.

• We expect this HOLD decision to result in a business-as-usual scenario. Critically, we highlight that the effect of monetary policy is limited at the moment – particularly as it relates to rate or volume tightening or easing. Supply-side factors – currency movement, food & energy prices – will drive inflation in the medium term. Moreover, whilst high lending rates may slightly stifle growth, the MPC has little room to ease given the knock-on effect that would have on inflationary pressure and currency weakness. We believe the greatest legacy of the meeting will be the “forward guidance” given by the MPC regarding monetary stance through 2017.

• On this front, the CBN Governor committed to moderating the growth in money supply which reached 19% in 2016 (threshold: 11%) despite a prima facie tight monetary stance during the period. Meanwhile, the MPC expressed a bullish view on food prices in 2017 (December Food Inflation: 17.4%) whilst noting that hawkish monetary policy and base effects should moderate inflation moving forward. This is an indication that the MPC is intent on switching to a less hawkish stance and the question is when, not if. Finally, the intimations over FX scarcity and monetary policy indicate an unchanged FX policy stance. As such, we consider this as the base scenario for 2017.