A communique without surprises

The decisions of the monetary policy committee (MPC) this week were widely anticipated. An unchanged stance is consistent with the twin challenges facing the committee of contracting GDP and accelerating inflation. The communique notes the clamour for a rate cut but rightly argues that inflationary pressures have not yet abated, and that easing would send the wrong signal to investors and savers. We have said for some time that the MPC will cut its policy rate once inflation starts to slow.
The communique argues that pressures on prices will subside as non-oil output recovers and the naira exchange rate starts to stabilize. We will leave the matter of whether the current regime amounts to a managed float to the academic community but question this notion of stability.

The rate quoted on the CBN website has been stable since September. The gap with the other rates has widened and is set to remain huge despite the CBN’s special fx auctions designed to clear the backlog. The game-changer in our view would be another devaluation, along with some movement towards the market-driven model that was trumpeted in June.

The committee does not expect a sustained oil price recovery, and warns that the gains since the OPEC meeting in Vienna are vulnerable to a supply glut from non-OPEC producers.

Its coverage of the national accounts for Q3 2016 rightly focuses on the fact that the non-oil economy expanded, albeit fractionally. The communique is confident that positive GDP growth will return this year. (We see the turning point in Q4 2016.)

There are several positive mentions of agriculture, specifically the food sub-sector, along with praise for the CBN’s support through its anchor borrowers’ programme.

Since the scope for monetary policy has been reduced by GDP and inflation trends, the communique looks to the fiscal side to lift Nigeria out of recession. It endorses FGN initiatives to tackle the debt arrears due to state governments and contractors, and pleads for a swift passage of the 2017 budget.

The most interesting part of the communique is the observation that, given the structural shifts in the global economy of recent months, policymakers “need to be inward looking and hasten efforts towards economic diversification to support the domestic economy”. Our take is that the committee feels the Trump effect could become viral.

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