Wait, wait and see
. Patience for the medicine to do its work: Nine members of the monetary policy committee (MPC) met this week, having reached quorum, and decided unanimously to hold the policy rate of 14.00%. The other policy parameters are also unchanged. Our call was a rate cut of 50bps on the grounds of slowing inflation in the months ahead and of providing a boost to economic activity. The committee concluded that a cut would have given a push to inflation and put pressure on the exchange rate, as well on the current account through higher imports. Its position is that its current policy stance has started to work and requires time to make its desired full impact.
. No change in fx policy: The committee noted the stability of fx rates and the healthy rise in reserves, while calling for expansion of the buffer. There was no indication of a change in its thinking on fx, and indeed there is little pressure to unify its rates.
. Toward sustainable growth: The committee opined in this particularly thin communique that the economy is returning to sustainable growth, citing as partial evidence the robust readings from its PMIs over the past year. We have doubts about the hoped-for quick passage of the 2018 budget, and about the response of the banks to the latest call to step up lending to employment generating industries.
. Warning of sticky food price inflation: There was no mention of the positive base effects for inflation and no sharing of the CBN’s in-house inflation forecasts so we cannot test its comments about the stickiness of food prices.
. Scope for additional yield compression: FGN bond yields have narrowed in recent months due to the strategy of increased externalisation of sovereign debt obligations and the resulting strong bid from offshore investors. We see a further leg to this compression, with yields in the mid-curve at around 13.00% by the next MPC meeting.