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MPC sings familiar song as it holds rates once again

In what felt like a re-run of the September meeting, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) unanimously voted to retain all monetary policy instruments at their July levels. Once again, the MPC highlighted the importance of price stability for engendering sustainable economic growth and promoting central bank credibility whilst also reiterating the perceived limitations of monetary policy transmission to real output. This decision was made in spite of recent Q3’16 GDP data showing a further year-on-year contraction of 2.24% (Q2’16: -2.06%) as well as a recent dearth of activity in Foreign Exchange (FX) markets.

The consensus remains that inflationary pressures are waning even as headline inflation remains high. Whilst the MPC is likely to be unperturbed by slight stubbornness in recent month-on-month inflation data, anchoring inflation expectations remains a key priority for the Committee. Thus the price stability argument for tight monetary policy remained in place.

We believe that likely developments over the next few months can help inform monetary policy direction in early-2017. Specifically, we believe a change in monetary policy direction in the near-term hinges on 1) outcome of the OPEC output cut deal and resolution of militant conflict in Niger Delta and security of infrastructure 2) FX inflows from external funding efforts such as the Eurobond offer 3) US Fed rate decisions in December 2016 and January 2017 4) the evolution of the FX market 5) a likely step-change in inflation as base effects kick in. Our verdict is that the MPC will be hard-pressed to reverse policy stance as long as pressure persists on the naira, making FX earnings a crucial variable. However, the expected moderation in year-on-year inflation could give the MPC more wiggle room to loosen as early as March. As a final note, we warn that as long as monetary policy and FX policy remain disjoint, monetary policy will remain limited next year.