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PRE-MPC COMMENTARY - “Hold” decision expected at July Meeting

Pre-MPC Commentary                                                       

“Hold” decision expected at July Meeting                                              

Against the backdrop of an improving macroeconomic environment, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will sit for its fourth meeting this year. Purchasing Managers’ Index numbers from June show that both manufacturing and non-manufacturing sectors of the economy are expanding whilst rising oil production and passage of the 2017 Budget in recent months should bolster the fiscal multiplier. We forecast Q2’17 GDP growth of 2.2%. Amidst this, there is less pressure on monetary policy to stimulate the economy, and policy tools could be better served in containing price pressures that threaten aggregate demand. Meanwhile, the need to support liquidity and stability in the foreign exchange (FX) market, especially with the U.S. Federal Reserve (Fed) in a tightening cycle, will also factor into considerations at the meeting.                                             

Recent inflationary trends will concern the MPC. Year-on-year inflation is falling but at a very slow pace, as month-on-month (m/m) inflation remains high. Average m/m in Q2’17 was 1.7%, the highest since Q2’16 (2.0%), a quarter that had a significant petrol price hike and large currency devaluation. Meanwhile, although high food prices remain a sticking point, pricing pressure looks more widespread now as stripping out more volatile food and energy prices, m/m inflation is at a year-high. Given the current pattern, and with inflation still way above the MPC target band, the case for prioritizing inflation looks clear-cut. However, the inability of previous monetary tightening (or current tight environment) to assuage inflation must be taken into account.                                         

In light of this, there is only one desirable course of action at present. Sticky domestic inflation and external considerations (Fed tightening) make it paramount that the MPC persists with its current stance. Whilst we see merit in further tightening to support the currency and tackle inflation, we highlight that inflation remains largely cost-driven. Meanwhile, sustained interventions in money supply tightening and liquidity mop ups should support the naira and address any lingering monetary inflation, especially as further tightening would pose too great a threat to financial system stability and Nigeria’s nascent economic recovery.