A rock and a hard place for the MPC

The monetary policy committee (MPC) opens its latest meeting in Abuja today, and is due to announce its decisions tomorrow afternoon. We see an unchanged stance. The committee is faced with an economy which has contracted y/y for three successive quarters and inflation which has accelerated for eleven months in a row on the same basis. It argues that it has little, if any responsibility for either trend, and we have some sympathy with its position.
GDP has gone into reverse due to the failure to diversify the economy and to the sabotage in the Niger Delta. Inflation has risen far above target due to supply-side factors. The MPC cannot be said to be the main culprit in either case although, along with the CBN, it has exchange-rate responsibilities and could have acted differently over the past 18 months.

It could hike in response to the surge in inflation, and to encourage savings. The committee did hike by 200bps to 14.00% in July but in an unsuccessful bid to attract departed offshore portfolio investors.

We read often of unconventional monetary policy but are not aware of a policy tool able simultaneously to counter surging inflation and shrinking GDP.

The above points to no change in stance this week. The MPC and CBN are looking to the fiscal side to lift the economy out of recession. The FGN has adopted an expansionary fiscal stance, which in our view is the right decision while it waits for its reforms to have a broad impact and oil revenues to recover.

Since the committee feels that its own ammunition is practically exhausted, we do not see a change in the policy rate until the expected marked decline in inflation on positive base effects. We forecast headline rates of 15.2% y/y in March and 11.3% in June.

On exchange-rate policy, we would be surprised by a change as early as this week. We do not see any signs that the monetary authorities or the political leadership are thinking in terms of a new direction. Next month the FGN is due to unveil an economic recovery plan, which may or may not extend to exchange-rate reform.

We close with a remark on openness. The committee, unlike its counterparts in several advanced economies such as the Eurozone, publishes the personal statements its members. However, this good work has been undone because the statements now only appear on the CBN website on the first day of the following meeting.

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