The monetary policy committee (MPC) holds its latest meeting in Abuja today and tomorrow. We had expected a small rate cut when the committee met in early April on the basis of the prevailing disinflation and favourable inflation expectations. It left its stance unchanged but the conditions this week are more conducive to modest easing in our view. That said, our analysis of members’ personal statements following the meeting in April pointed to a high degree of caution (Good Morning Nigeria, 09 May 2018). Indeed one member referred to a “trilemma”, indicating that tightening had been under consideration.
- The committee is anxious to offer positive real interest rates so as to lock in offshore, fixed-income investors, and encourage domestic savings and investment generally. When it met in April, the policy rate was 30bps below prevailing headline inflation: it is now 150bps higher.
- In the months ahead, we see a further slowdown in the headline measure, to 11.3% y/y in May and 10.5% in June.
- Thereafter the committee sees inflationary pressures arising from fiscal policy guided by the electoral calendar. It is not our role to say that one administration is more or less prudent than another. However, an analysis of historic inflation data does not show any signs of wanton irresponsibility in the build-up to the elections in 2011 and 2015.
- The personal statements called for the approval of the 2018 budget as soon as possible. The National Assembly duly passed the budget last week. Subject to the sign-off by the president, the FGN can now make the planned capital releases.
- The assembly raised total spending by N510bn and called for a supplementary budget to cover the payment of fuel subsidies. This expansionary fiscal stance, we agree, clearly has implications for the money supply and inflation.
- Other concerns of members are that a rate cut would weaken the current account through its boost to imports, and would unsettle offshore investors and therefore create pressure on the exchange rate. We think that the current account could absorb what would amount to a small increase in imports.
- Offshore investors have been nervous about exposure to emerging markets, particularly local currency assets, in the past month. However, we do not see a flight from Nigeria on any scale in these conditions, given the attractive returns on naira debt instruments.
- The emergence of the economy from recession has been driven mostly by the oil sector. Even allowing for the “disconnect” between the policy rate and real economy lending rates, a modest rate cut of, say, 50bps, would bring some relief to for non-oil sectors.