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PRE-MPC COMMENTARY - Inflation, FX considerations should stay MPC hand

Inflation, FX considerations should stay MPC hand                                                                        

At the start of this week, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will sit for its 115th meeting, confronted by the reality of sticky domestic inflation and weak economic recovery, as well as accelerating monetary tightening in the United States (U.S.). More generally, in determining the optimum short-term path for monetary policy levers, the MPC would have to weigh up contesting issues of inflation, foreign exchange stability, economic growth, and government financing. Perusing these issues, we eschew the view that economic growth arguments warrant monetary easing at this time. Rather, we believe that foreign exchange and price stability are more potent mechanisms for economic stabilisation.                                                                             

Primarily driven by base effects, recent currency stability, and lower energy costs, annual inflation has trended down – from 18.7% in January to 16.0% in August. However, inflationary pressures remain strong as excluding more volatile food and energy prices, average month-on-month inflation is relatively unchanged from 2016 (2017: 1.13% m/m  vs. 2016: 1.15% m/m). Moreover, food prices are expected to accelerate as a result of recent flooding in Benue State, the “Food Basket of the Nation”. Amidst this, the urgency of the price stability agenda calls for tight monetary policy in the interim.                                                                               

The fragility of Nigeria’s FX market gains and economic recovery, as well as evident inflationary pressures, cautions against substantial changes to current monetary policy. Moreover, loosening monetary policy may not have the desired effect on economic growth amidst conservative loan growth in the banking sector. In light of these, we anticipate a HOLD decision at the conclusion of this week’s MPC meeting. That said, we expect the CBN to persist in efforts to reduce market interest rates – through its auctions and OMO interventions – in a bid to ease government borrowing costs.