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MPC holds again, perhaps not for the last time

MPC holds again, perhaps not for the last time
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) maintained monetary policy status quo at its final meeting of 2017, in line with forward guidance provided at its September 2017 meeting. Defending the decision to hold all monetary levels at their previous levels, the MPC highlighted that tightening further may rein in inflation, but would adversely affect economic growth and financial stability. In a similar vein, easing prematurely – as has been advocated in certain quarters – may lower borrowing costs in the economy, but could pose a significant risk to price stability, foreign exchange stability, and external balances. In our view, the “Hold” decision is a testament to the “wait and see” stance that the MPC has adopted through the year, amidst sticky inflation and a sluggish economic recovery.

All things considered, we expect the MPC to ease monetary policy in Q1’18, but consider its January meeting an unlikely time given our inflation forecast of 15.4% y/y for that month. However, with inflation expected to moderate to 14.7% y/y by March, and Core inflation (presently 12.1%) even lower, the MPC would have leeway for a slight policy shift. Specifically, we expect a 100bps rate cut in March to kick off the easing cycle, as the pace of moderation in inflation is unlikely to permit more aggressive policy action.