Pre-MPC May 2022: MPC May Raise MPR to Stabilise the External Sector

Godwin Emefiele, Governor Central Bank of Nigeria (CBN)

May 19, 2022/Cordros Report

The Monetary Policy Committee (MPC) is expected to hold its third meeting of the year on the 23rd and 24th of May 2022. Suppose the evolution of events in the international and domestic scenes since the last policy meeting is anything to go by, we envisage the “reactive function” of the Committee will be significantly challenged at this meeting. On the global scene, sustained inflationary pressures have prompted global central banks to march on with their hiking cycles. At the same time, the unabating war between Russia and Ukraine combined with renewed lockdowns in China have created cracks in the health of the global economy. On the domestic front, the sharp increase in headline inflation to 16.82% y/y in April – the highest since August 2021 will be a cause for concern to committee members, particularly as the trend will continue in the coming months due to the pass-through impact of elevated global energy prices. In our opinion, the hawks will likely judge that it is appropriate to take the pedal off the throttle in supporting economic recovery and switch to a hawkish monetary policy stance to anchor inflation expectations and stabilize the external sector. However, we think considerations about the implications of a rate hike on the domestic interest rate environment may prompt the majority of Committee members to push back a rate hike until the next policy meeting in July. All in, we think the Committee would retain the MPR at 11.5% alongside other monetary policy parameters. However, we do not rule out the possibility of a 50bps hike in the MPR given the hawkish rendition among global central banks and the indirect impact of the Russia/Ukraine crisis on domestic inflationary pressures.        

Domestic Economy Maintains Positive Growth Path

Domestic economic activities have remained on the path of recovery in line with the normalisation of economic activities and sustained government interventions. However, while the manufacturing PMI (50.1 points vs January: 51.4 points) remained above the 50-point threshold for the fourth consecutive month as of February, we highlight that the non-manufacturing PMI (49.0 points vs January: 49.0 points) is at its highest level since February 2020 (58.6 points) albeit below the 50-point benchmark. We suspect that the (1) uncertainties from the country’s security challenges and (2) infrastructural constraints constitute the primary factors responsible for the unimpressive reading in the non-manufacturing PMI.

Overall, we expect the growth momentum to be sustained in 2022FY, albeit moderately, as the impact of the favourable base from the prior year dissipates. As a result, we project the economy would grow by 2.81% y/y and 2.92% y/y in Q1-22 and 2022FY, respectively.

Inflationary Pressures Remain Biased to the Upside in the Near Term

Domestic inflationary pressures have maintained an uptrend since the marginal slowdown witnessed in January. Specifically, the headline inflation increased for the third consecutive month, rising by 90bps to 16.82% y/y, the highest in eight months. We attribute the increase to the pass-through impact of (1) higher logistics and haulage costs, (2) increased demand from Ramadan and Easter periods, and (3) lean season. Parsing through the breakdown provided, we highlight broad-based pressures across the food (+117bps to 18.37% y/y) and core (+26bps to 14.18% y/y) baskets.

We expect the Committee to express concerns about the rising inflationary pressure even as the Russia-Ukraine conflict and ongoing planting season introduce fresh risks amidst the unfavourable base from the prior year. In its usual practice, we expect the Committee to urge the fiscal authorities to take decisive steps in tackling the challenges (particularly security) limiting food production in the country.

Currency Pressures Persist in the Parallel Market on Increased Demand

The Naira remained pressured against the US Dollar since the last policy meeting on 22nd March, given limited FX supply at the official channels amidst increased FX demand exacerbated by pre-election activities. Besides, we understand that travellers and manufacturers have continued to recourse to the parallel market as most of their FX needs remain unmet at the official windows. Accordingly, FX pressure persisted across the parallel market (Naira depreciated by 2.5% to an average of NGN588.74/USD) and IEW (Naira weakened by 0.2% to an average of NGN417.59/USD) since the last policy meeting. That said, inflows to the Investors and Exporters Window (IEW) rose by 38.9% m/m to USD1.58 billion in April, albeit 61.9% below the pre-pandemic level of USD4.14 billion (February 2020). We highlight that the increased inflows during the month reflect higher inflows across the local (+39.9% m/m to USD1.24 billion) and foreign sources (+34.1% m/m to USD340.60 billion). Notably, inflows from the exporters (+81.0% m/m to USD429.5 million) rose to their highest level since the CBN created the IEW, reflecting the initial impact of the CBN’s non-oil export proceeds repatriation rebate scheme. We discussed the scheme extensively in our report titled Assessing the CBN’s Attempts to Attract Non-Oil Exports.

Overall, we expect the gross FX reserves at current levels to comfort the Committee that it has enough liquidity to maintain periodic FX intervention, albeit at a pace substantially below pre-pandemic levels.

Global Central Banks Still on Course with Hiking Cycles

Since the last MPC meeting in March, global central banks have marched on with interest rates hike to contain inflationary pressures. Although the US headline inflation moderated by 20bps to 8.3% y/y in April after hitting a 41-year high of 8.5% y/y in March, the reading underperformed market expectation of 8.1% and remained substantially above the Fed’s 2% target. In the UK, headline inflation surged to a 40-year high of 9.0% y/y in April from 7.0% y/y in March. To anchor inflation expectations, the US Federal Reserve raised interest rates by 50bps to a target range of 0.75%-1.00% at the end of its latest meeting (4th May). Similarly, the Bank of England (BOE) raised interest rates for the fourth consecutive time at its recently concluded meeting (5th May), noting that inflation will remain elevated in the near term due to the pass-through impact of the Russia/Ukraine crisis on energy prices. 

We believe the hawkish chorus among global central banks’ will be a major theme of discussion at this meeting, given that tighter global financing conditions result in capital flow reversals from emerging economies like Nigeria. Nonetheless, we think the Committee will take solace in the CBN’s capital control measures to mitigate the exodus of FPIs from the economy.   

MPC May Raise MPR to Stabilise the External Sector

All in, we think the Committee would retain the MPR at 11.5% alongside other monetary policy parameters. However, we do not rule out the possibility of a 50bps hike in the MPR in light of the tightening of monetary policy by global central banks and the indirect impact of the Russia/Ukraine crisis on domestic inflationary pressures.   

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