On hold on a majority vote expected
The monetary policy committee (MPC) opens its latest meeting in Abuja today, and is due to announce its decisions tomorrowafternoon. In July it reached a split decision, with six members in favour of no change and two for easing. In the members’ personal statements, more than one member considered the case for tightening to attract offshore portfolio investors (Good Morning Nigeria, 21 September 2017). This week we again expect no change in the 14.00% policy rate on a majority vote.
- We have seen one argument in circulation that the committee may be tempted to ease this week because of the decline in core inflation, from 18.1% y/y in December to 12.3% in August. It has some weight because monetary policy does influence core inflation.
- The notional reference range for inflation of between 6% and 9%, however, seems on the horizon, and applies to the headline measure for food and non-food items combined. The rate for this measure has declined for seven months in succession with help from positive base effects. This decline has been unspectacular, amounting to less than 300bps in total, and is unlikely to gain momentum until next year in our view.
- Among the other arguments for easing, we pick out the putative impact on growth and the government’s borrowing costs. The textbooks tell us that lower interest rates attract new borrowing and so provide a boost to growth. Yet in the Nigerian context the banks may not pass on the full benefit of any policy rate cut to their customers. Further, they lend on scale to a handful of sectors that tend to be capital, rather than labour intensive. Their loans are heavily concentrated on large companies.
- The MPC’s exhortations over countless meetings have had minimal impact on the banks’ lending practices. This is unlikely to change for well-documented reasons. A far greater boost, as the committee has routinely argued, would come from labour and other structural reforms, which are the FGN’s and not its remit.
- There is a little more merit in our view to the argument for easing for the sake of the government’s borrowing costs. Per the 2017 budget, the FGN’s debt service is projected at about 35% of its revenues. The outturn for the first few months indicated a ratio around 40%, and threatens to increase.
- The borrowing costs are more likely to ease through offshore portfolio investment in local currency debt instruments through NAFEX. Last week was highly promising in this respect.
- Pension assets rise to N6.7trn: The total assets under the Contributory Pension Scheme rose to N6.7trn (US$18.6bn) as of the end of May this year. Figures obtained from the National Pension Commission on Friday showed that 73.1% of the total funds had been invested in the Federal Government of Nigeria’s securities. (Source: Punch)
Power generating firms owe banks N356bn: Electricity generation companies currently owe Deposit Money Banks a total of N356bn (US$988.8m). Also, 50% of the total quantum of electricity being generated across the country is lost as a result of poor distribution network in the system. (Source: Punch)
FX window records US$1.3bn transactions in one week on soaring investor confidence: Total trade value for the week showed a marked improvement at US$1.3bn, compared with the US$803.1m recorded in the preceding week. The surge in activities at the window was attributed to offshore investor interest in treasury bills and the primary market auction (PMA) held last week by the Central Bank of Nigeria (CBN) with the NAFEX rate closing at N360.39 per US dollar. (Source: Thisday)