Rifles down, MPC holds fire
The monetary policy committee held its latest meeting a few weeks ago. The seven members of the committee present decided by six votes to one to hold the policy rate at 14.00%. Additionally, all other parameters were left unchanged. The outlier during the voting process decided to vote for a cut to signal an ease to the current stance of tight monetary policy.
The committee noted the welcome recovery in economic growth recorded in Q2. The modest growth of 0.6% y/y was attributed to fiscal injections and improved Fx supply on the back of relatively higher crude oil prices. However, there were concerns over growth sustainability as the committee stated that the recovery is still fragile.
The MPC felt that it is not until Q2 2018 that growth could pick up markedly. The drivers of growth in its view include capital releases from the 2017 budget (perhaps, this is overstated), revenue boost from firmer crude prices, exchange rate stability, some policy initiatives from the FGN and even the CBN’s role in development finance as the provider of credit lines.
On the demand side, consumer confidence is set to pick up given the recent approval by the FGN to pay salary and pension arrears. Additionally, the committee pointed towards a potential boost in consumption arising from the FGN’s payment of salary arrears to former employees of Nigeria Airways and its efforts to bolster state government finances.
Another indicator examined was the Purchasing Managers’ Index (PMI); the index checks the temperature of the manufacturing sector. Results from the CBN’s surveys have shown an expansion for the past three months, pointing towards a positive outlook for the economy.
Committee members also have their eyes glued on the inflationary trend. Headline inflation has seen a steady slowdown over the past seven months. As at August 2017, headline inflation was 16.01% compared with 18.71% at the start of the year. The slowdown was largely attributed to favourable base effects, reduction in money supply as well as a relatively stable Fx environment.
Despite the slowdown in the headline inflation, food price inflation remains stubbornly high and is now above 20%. Rising prices of farming inputs, disruptive attacks by herdsmen on farmers, flooding in some areas and signals of a weak harvest were cited by the committee as reasons for the sticky food price inflation.
Meanwhile, the m/m increase in headline inflation slowed from 1.2% in July to 1.0%. This suggests a movement towards general price stability; the stable Fx environment has been supportive. The trend is also consistent with the softening of household demand.
However, the decision of “no change” on the policy rate was bolstered by the fear that easing would encourage a spike in inflation and push real interest rates further into negative territory.
Unsurprisingly, the celebratory tone of victory due to the relatively stable Fx market emerged at this meeting. The authorities have adopted multiple currency practices (MCP). These include: spot and forward sales to banks for the use of importers; further sales to banks at N357 per US dollar for the use of the retail segment for travel, medical and educational bills; sales to the bureaux de change; sales to SMEs; and the investors and exporters’ window (NAFEX). The CBN still maintains its official rate (for limited transactions), which is currently N306 per US dollar.
Meanwhile, on the parallel market (i.e. black market) the naira exchange rate has appreciated from about N520 per US dollar before the interventions to N365.
Besides manufacturers enjoying the benefits of improved Fx liquidity and perhaps Fx affordability as seen in the pickup in imported inputs, offshore portfolio players have brought new money into Nigeria through NAFEX. Since its launch in late April, turnover has amounted to US$12.9bn according to FMDQ.
Although loosening its stance would encourage growth and stimulate consumer spending, it could exacerbate inflationary pressure as well as disrupt the relative stability in the Fx market.
Essentially, the MPC expects authorities in charge of the country’s fiscal policy to step up its efforts in jumpstarting the economy. On the fiscal side, capital releases from this year’s budget have been slow. Increased momentum in expenditure directed towards growth-stimulating sectors of the economy would be positive for socio-economic factors such as employment.
The year is far spent and only one more MPC meeting is set to hold in 2017. Unless drastic shocks hit the economy within the next five weeks, the general expectation is for the committee to maintain its “steady as she goes” stance.
Given President Buhari’s recent submission of candidates to the Senate for confirmation of roles within the CBN, (four of which he has recommended as independents on the MPC and of course, one consideration is for the deputy governor role), by Q1 next year the committee’s roundtable should be complete with twelve members.
Hopefully, the new additions bring fresh views to the table and maintain the broader vision of pushing Nigeria’s economy forward by applying a healthy mix of monetary policy tools to support and also synergise with the fiscal policy.
Chinwe Egwim, Macro Economist & Fixed Income Securities Analyst at FBN Merchant Bank