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PRE-MPC COMMENTARY - Monetary path to remain stable at start of year

​This week, the Monetary Policy Committee (MPC) will sit for the first meeting of 2017 as they attempt to help steer the economy onto the path of recovery whilst maintaining price stability. The challenge is enormous. Inflation surged over the course of 2016 on the back of currency weakness and higher energy prices. This precipitated a switch towards tight monetary policy in March, a stance that was maintained for the rest of the year. In addition, acute dollar shortage and pressure on the naira compelled the CBN to switch towards a more flexible foreign exchange (FX) rate regime, at least at first. The subsequent reversal to a soft peg approach stifled foreign capital inflows and induced further currency depreciation in the parallel market. Amidst all this, Nigeria also slipped into a recession, recording three successive quarters of negative y/y GDP growth. This is the situation faced by the MPC: Decade-high inflation of 18.6% (December 2016), incessant dollar scarcity and depreciation pressure on the naira, and a weak economic climate.

Therefore, in many ways, underlying conditions in 2017 are similar to the latter half of 2016. This implies unchanged choice dimensions for the MPC heading into their first meeting of the year. In recent times, they have shown willingness to prioritise price stability over economic growth, much to the chagrin of certain sectors of the economy. We expect this focus to persist in 2017. In light of this, it is useful to analyse the effectiveness of the monetary stance adopted last year.

There has been no improvement significant enough to warrant a switch in monetary policy direction at the moment. Tightening monetary policy would neither reduce this nature of inflation nor attract relevant capital inflows to prop up dollar supply in the economy. Moreover, there may still be a harmful effect on economic growth. What this means is that monetary policy on its own is limited at this moment. Instead, FX policy must be revisited. We consider a change here unlikely and given that, expect the MPC to once again acknowledge the prevailing impotency of monetary policy levers available and vote to retain all at their current levels.

Verdict: Hold