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NIGERIA MONETARY POLICY COMMITTEE - MPC retains brakes on policy rates

During the past year of declining real output, cost-push inflationary pressure and lacklustre foreign appetite for Naira assets, the Monetary Policy Committee (MPC) adjusted three of its four key parameters in its quest to boost lending and reflate the economy. After considering several real, monetary, and external factors, the MPC decided to maintain status-quo by holding all parameters constant in its first meeting of the year. During the past year of declining real output, cost-push inflationary pressure and lacklustre foreign appetite for Naira assets, the Monetary Policy Committee (MPC) adjusted three of its four key parameters in its quest to boost lending and reflate the economy. After considering several real, monetary, and external factors, the MPC decided to maintain status-quo by holding all parameters constant in its first meeting of the year.

Trudging a sticky recovery path

Citing vaccine developments and its impact on oil price recovery and external reserve accretion, the MPC noted that the virus remained a threat to economic recovery given the spike in fatalities and rapid spread of a newer strain of the virus. Against this backdrop, the Bank cautioned against a second wave of lockdown due to the downside risks it poses to the anticipated recovery. Making reference to recent GDP numbers, the Committee noted the milder economic contraction recorded in Q3’20 (-3.62%) compared to Q2’20 (-6.10%) due to the reopening of the economy. However, the lag effects of the lockdown, security challenges and FX challenges are contributory factors to dampened recovery prospects. While the ENDSARS protests extended the contraction in manufacturing activity into the month of October, the brief recovery in November could not be sustained into December due to the stifling impact of the FX situation. With two bearish readings out of three, the manufacturing PMI predicts another quarter of declining industrial output in Q4’20 while the consistently underwhelming services PMI reading portends another bearish outturn for the services sector.

MPC to sustain dovish stance

The CBN’s decision to hike the Cash Reserve Ratio (CRR) in H1’20 amid enforcement of loan-to-deposit ratio (LDR) floors raised several concerns over liquidity in the banking system. Despite the hostile business climate, huge deductions were made from banks’ reserves for not meeting LDR benchmarks, limiting room for credit expansion. According to Q3’20 GDP numbers, growth in the financial services sector slowed to single-digit levels, partly because of the high-base effect. At the meeting, the Committee commended the CBN on the industry’s low non-performing loans ratio, which is slightly above the prudential benchmark despite its aggressive credit expansion programme. However, we note the subsisting headwinds in the business environment could have contributed to the slowdown in loan expansion amid restrictive CRR debits.