Monetary policy set to remain on hold
The monetary policy committee (MPC) opens its latest meeting in Abuja today, and is due to announce its decisions tomorrow afternoon. We see an unchanged stance. In its decisions it has to allow for an economy which has contracted y/y for four successive quarters and inflation which has remained stubbornly high in m/m terms. It has argued over several meetings that it has little, if any responsibility for either trend. We admit to some sympathy with its position.
The committee will have access to the national accounts for Q1 2017, which are now due for release tomorrow. The data may or may not show an end to the recession, however marginal. The governor has sought to dampen hopes: we see token growth of 0.2% y/y.
More importantly, the committee has been wary of easing, arguing that on the rare occasions it has cut the policy rate, the beneficiaries of the additional liquidity were not productive sectors such as agriculture but traders with substantial fx needs. This analysis rings some familiar bells but is also a reflection on bank supervision and regulation.
The MPC looks to the fiscal side to drive the economic recovery. Now that the 2017 budget has been finally approved by the National Assembly, we expect a call from the committee to close the process for the year and begin the capital releases.
Its last communique was dismissive of the positive base effects responsible for an improvement in the y/y rate in February and concentrated on the pick-up on a m/m basis. Supply-side constraints remain extensive: power, fuel and, it appears anecdotally, some food stuffs. The medium-term outlook for inflation is reasonable, however, and in these circumstances a rate cut would also come as a surprise.
On exchange-rate policy, we expect plenty of commentary. The CBN’s step-up in its fx interventions has had some positive results. The naira has appreciated on the parallel market and manufacturers are enjoying improved access to imported raw materials. Retail sentiment has been lifted and there have been stirrings from a few offshore portfolio investors. The committee may conclude that some fine-tuning is required. We question how far the CBN can expand its interventions without the depletion of reserves that it is determined to avoid.
The CBN released the personal statements from the meeting in March on Friday. This was one day sooner than two months previously but does not provide the market with the necessary guidance on members’ thinking.