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PRE-MPC COMMENTARY - “Hold” predicted even amid higher inflation

“Hold” predicted even amid higher inflation                                                                    

The fourth Monetary Policy Committee (MPC) meeting of 2018 will conclude later today. In a year when prior expectations of monetary stimulus to boost growth have made way for a more hawkish outlook amid rising inflation and an unwelcome external backdrop, the MPC has voted to hold all policy levers up to this point, even with the shadow of elections looming. There was a seven/three (hold/hike) split at the July meeting, and although we anticipate an even closer vote, we do not expect the committee to tighten monetary policy as the key variables (inflation and exchange rate market) have mostly evolved in line with expectations formed in prior months. Therefore, we predict another HOLD decision.                                               

The evolution of the external environment and domestic inflation present a fair case to hike interest rates, but we anticipate a hold decision because the key variables have evolved as expected. To clarify, we argue that the MPC has largely anticipated the observed trends and the fruition of expectations ought not to alter policy path. Notably, the reversal in inflation was expected with the CBN Governor Godwin Emefiele saying, “My immediate predisposition is for further tightening of domestic policy stance to rein in expected inflation and ensure FX market stability,” in his May statement. In addition, those that voted to hike rates at the July meeting did so in order to anchor inflation expectations. In his July statement, Joseph Nnanna explained that he voted to raise the monetary policy rate (MPR) by 50bps to “signal the need to anchor inflation expectations”. Finally, it is clear that inflation and external conditions would drive a shift in committee consensus. The statement made by Isa-Dutse Mahmoud in his debt MPC meeting read, “If the liquidity situation and external conditions worsen in the coming months, we should raise rates and use other instruments as well to reduce the negative impact on inflation and exchange rates.” In our view, neither external conditions nor domestic inflation has changed sufficiently to warrant a shift in consensus vote, which would require a swing of three voters (or two voters and the CBN Godwin Emefiele). Thus, we expect the vote to be closer but for the result to be the same: a HOLD decision.