January 22, 2021/Cordros Report
The Monetary Policy Committee (MPC) is expected to hold its first meetings of the year on the 25th and 26th of January 2021. We expect the Committee to assess the developments in the domestic and external macroeconomic and financial markets since its last meeting in November and provide guidance on the path of monetary policy in 2021.
Economic Recovery Likely to be Prolonged
On the domestic front, we believe the recent rise in new COVID-19 cases will be on the front burner given the potential to unwind gains from fiscal and monetary stimulus since the reopening of the economy in May 2020. Elsewhere, factory activities slipped back into contractionary territory in December as the manufacturing PMI printed 49.6 points (November: 50.2 points) – the seventh contraction in the last eight months. Asides from the lull in factory and business activity, we note that the oil sector is yet to recover to pre-pandemic levels given Nigeria’s continued compliance with the OPEC+ production cuts.
Mounting Inflationary Pressures
Inflationary pressure has also intensified since the last MPC meeting in November (October 2020 Inflation: 14.23%). Consumer prices have since risen to 15.75% y/y as of December largely due to (1) underwhelming harvest season, (2) persistent security challenges, and (3) poor distribution network. We expect the committee to reiterate its earlier view that inflationary pressures are driven by these supply-side factors which are outside the control of monetary policy.
Preference to Keep Yields at Low Levels
We also expect the committee to reiterate its resolve to keep yields at low levels in the near term to compel deposit money banks to boost private sector credit while also easing deficit financing pressures at a time when revenue from oil and non-oil sources are pressured.
World Bank Support and Higher Oil Prices Provide Succour to the FX Reserves
On the external front, conditions in the oil market and prospects for continued recovery in the global economy have brightened on the back of concerted efforts by policymakers towards vaccination and additional stimulus from the U.S. Supported by the combined impact of (1) the OPEC+ decision to only reduce oil production cuts by 0.5 mb/d, (2) Saudi Arabia’s decision to unilaterally cut output by 1.0 mb/d, (3) a gradual decline in U.S. shale production, and (4) positive news on the efficacy of COVID-19 vaccines, Brent price has risen by 27.2% to an average of USD54.29/bbl so far in January 2021 (November average: USD42.69/bbl).
Covering all Bases
On a balance of factors, we believe the Committee will keep policy rates unchanged and affirm the use of unorthodox measures such as CRR debits, Loan-to-Deposit Ratio (LDR), and direct intervention in employment-stimulating sectors to influence macroeconomic outcomes and ultimately attain macroeconomic stability.