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PRE-MPC COMMENTARY - Hold decision even as macro conditions improve

At the start of this week, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) convenes for its 3rd meeting of 2017 as it seeks to steer Nigeria out of a stagflation environment. Whilst the MPC refrained from altering any policy lever at the previous meetings this year – retaining the monetary policy rate (MPR) at 14% on both occasions – its dovish outlook in January made way for greater caution in March. Doyin Salami, one of ten sitting MPC members at the March meeting, voted to raise rates, largely on the back of unexpectedly sticky consumer prices. Inflation is still high (April: 17.2%), propelled by rising food prices but stability in the oil sector has buoyed the wider economy. Though we estimate another negative GDP growth figure for Q1’17 (-0.7% y/y), we expect a rebound in Q2’17 (2.2% y/y) as base effects kick in amidst an improving underlying environment. With this, we believe the MPC’s choice set remains constrained by stubborn inflation numbers.

Monetary policy decisions ought to be forward-looking and we retain our forecast of down-trending inflation for the rest of the year. Yet this decline will be driven primarily by base effects and the pace of the moderation is likely to be slow as inflationary forces still plague Nigeria’s economy. This is likely to give the MPC pause in loosening policy on lower inflation expectations. Moreover, any rate cut would be a worrying signal in such an inflationary environment and may undermine investor confidence in the market.

Generally, the economy looks to be on the uptrend (April Manufacturing PMI: 51.1), and fiscal policy looks set to kick off with the 2017 Budget approved by the Senate and now awaiting Presidential approval. Whilst we appreciate the argument for moving towards a handshake between fiscal and monetary policy, we highlight that price stability is the dominant factor in monetary policy so sticky inflation must be seriously considered. Ensuring stability in fiscal and FX policy should be able to steer recovery and tackling inflationary pressures is vital for resuscitating consumer demand. We expect the MPC to maintain its stance until a notable change in inflation behavior.