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PRE-MPC COMMENTARY - “Hold” anticipated, in line with forward guidance

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) sits for its final meeting of the year, and we expect it to maintain the monetary policy status quo heading into 2018. Forward guidance from the September MPC meeting suggests the MPC has adopted a wait-and-see approach to economic developments until Q1’18, a decision vindicated by the stickiness of economic variables between its September and November meetings. Particularly, inflation is little changed in the last few months, giving the MPC little room to tilt away from its tight monetary policy stance. Nevertheless, the CBN itself has subtly signaled lower interest rates in the near-term – particularly through its interventions in the fixed income market – as it looks to support economic recovery.

Annual inflation has been sticky in recent months (June: 16.1% y/y, October: 15.9% y/y) but the month-on-month trend has been declining at a pace that would please the MPC (June: 1.6% m/m, October: 0.8% m/m). We expect annual inflation to remain sticky till year-end (December forecast: 15.6% y/y) but moderate at a quicker pace in Q1’18 as base effects from high 2017 inflation kick in (March 2018 forecast: 14.7% y/y). Therefore, we foresee abating inflation providing more room for the MPC to perhaps look towards monetary easing after Q1’18, as hinted by the Central Bank Governor in his September MPC speech.

Taking a cue from this signal, and rhetoric at the September meeting, we are of the view that the MPC is likely to lower the policy rate in the coming months, in line with market interest rate direction.