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PRE-MPC COMMENTARY - MPC may hold policy levers but FX change required

Next week’s Monetary Policy Committee (MPC) meeting comes at a pivotal time. With fiscal policy in the throes of reflating the economy (₦3.7 trillion or c.80% of pro-rated budget spending disbursed as at Q3), the two key policy paradigms of the Federal Government (FG) are able to work simultaneously – a privilege previously denied as a result of earlier budget delays. The last monetary policy change (an increase in the monetary policy rate from 12% to 14%) was in July and economic conditions have largely been in stasis since then. In particular, the furor over the Foreign Exchange (FX) market has persisted despite CBN decision to officially float the local currency in June this year. Next week, the MPC will have the opportunity to review their policy stance for the final time this year and perhaps, set a marker for 2017 as well.

FX policy currently stands as the bedrock of monetary policy as it remains the crucial variable for investors, businesses, and individuals alike. Tight monetary policy will only bear fruit with a robust FX market in support and absent this, the argument for keeping rates high becomes significantly weaker. Thus, even as we do not expect the MPC to deviate from its recent tight stance, we do not expect much success in achieving its objectives until clarity, transparency, and flexibility is restored to the FX market. Although the MPC meeting is ostensibly to review policy levers such as the monetary policy rate, cash reserve ratio, and liquidity ratio, the elephant in the room remains the most important variable.

Verdict: Hold