September 21, 2020
by FBNQuest Research
The monetary policy committee (MPC) meets today and tomorrow in Abuja. Our hunch is that it will again opt for an unchanged stance, which was its decision in July on a vote of eight to two. Headline inflation has continued to creep upwards over the past two months, and the committee’s preferred mindset is a wait-and-see position. We should add that the pass-through from the policy rate to the real economy is muted. If asked to justify further easing, we would fall back on the contracting economy and the fact that central banks almost everywhere are cutting rates.
The headline rate of inflation has now passed 13.0% y/y, having risen for twelve successive months. Food prices have been the main driver of the acceleration but we cannot ignore the pick-up in the core measure from a combination of the lockdown, exchange-rate adjustments and general structural weaknesses.
For some members of the committee, the fact that the headline rate is moving further ahead of the policy rate of 12.50%, not forgetting the reference range for inflation of between 6.0% and 9.0% y/y, is a powerful reason to keep the rate on hold.
We should watch out for any changes to the CBN’s thinking on growth this year. We learnt from the personal statements following the MPC meeting in July that in-house staff estimates then had a modest contraction of between -1.3% and -1.7% this year (Good Morning Nigeria, 17 August 2020). Staff projections along these lines, which are far less toxic than those of the IMF and World Bank, militate against a rate cut.
We expect an update on the CBN’s many credit interventions, which have multiplied within its response to the Covid-19 virus. It has set out the framework for two new credit facilities within the past week. The broader growth of lending to the private sector reached 24.4% y/y in July thanks in good part to the CBN’s tightening of the loan-to-deposit ratio for banks since July 2019.
This is among the most effective of CBN policies in recent years, and further expansion in loan books, if revealed on Tuesday, would again point to an unchanged stance.
We would be surprised if the communique has much to say about fx. This is more the territory of the CBN (although we acknowledge the overlap with membership of the committee). Further, the CBN’s thinking on fx is well documented.
In May the committee reminded the market that the maintenance of price stability was the CBN’s “primary mandate” yet nonetheless delivered a rate cut of 100bps. A repeat would be highly unlikely this week in our view.