Pre-MPC Commentary – Hold Anticipated, In Line With Forward Guidance

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November 17, 2017/Vetiva 

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) sits for its final meeting of the year, and we expect it to maintain the monetary policy status quo heading into 2018. Forward guidance from the September MPC meeting suggests the MPC has adopted a wait-and-see approach to economic developments until Q1’18, a decision vindicated by the stickiness of economic variables between its September and November meetings.

Particularly, inflation is little changed in the last few months, giving the MPC little room to tilt away from its tight monetary policy stance. Nevertheless, the CBN itself has subtly signaled lower interest rates in the near-term – particularly through its interventions in the fixed income market – as it looks to support economic recovery.

Inflation restricts move, but outlook more positive
Annual inflation has been sticky in recent months (June: 16.1% y/y, October: 15.9% y/y) but the month-on-month trend has been declining at a pace that would please the MPC (June: 1.6% m/m, October: 0.8% m/m). We expect annual inflation to remain sticky till year-end (December forecast: 15.6% y/y) but moderate at a quicker pace in Q1’18 as base effects from high 2017 inflation kick in (March 2018 forecast: 14.7% y/y).

Therefore, we foresee abating inflation providing more room for the MPC to perhaps look towards monetary easing after Q1’18, as hinted by the Central Bank Governor in his September MPC speech.

Q3’17 GDP should not distract MPC
On Monday, the National Bureau of Statistics will release Nigeria’s Q3’17 GDP figures. We expect growth to come in much stronger than in Q2’17 – 2.47% y/y vs. 0.55% y/y – primarily driven by a strong recovery in oil volumes – 2.03 mb/d in Q3’17 vs. 1.87 mb/d in Q2’17 – and deeper gains from improved foreign exchange market liquidity. We note that Purchasing Managers’ Index (PMI) numbers were particularly high in Q3’17, with average manufacturing PMI and non-manufacturing PMI at 54.3 and 54.5 respectively.

Continued economic recovery aside, the underlying economy is unlikely to have improved significantly, with growth concentrated around agriculture and oil. This presents a case for monetary stimulus to propel growth in 2018, without sacrificing gains in price and foreign exchange stability.

Fixed income yields signal lower rates
Between September and November, there has been notable change in the fixed income market. In particular, rates on all but the shorter dated maturities have moderated during the period. For example, at Primary Market Auctions, the stop rate on the 364DTM bill declined from 17.0% on September 20th – less than a week before the September MPC meeting – to 15.6% on November 15th.

Along with a moderation in bond yields, this development was partly driven by the CBN’s decision to concentrate its liquidity mop ups on the shorter-dated maturities, in turn lowering yields on the other parts of the curve. At the same time, short-term yields have been sticky – 91DTM stop rate little changed from 13.25% to 13.00% – as the CBN looks to keep short-term interest rates high to tackle inflation.

Taking a cue from this signal, and rhetoric at the September meeting, we are of the view that the MPC is likely to lower the policy rate in the coming months, in line with market interest rate direction.