The monetary policy committee (MPC) opens its latest meeting in Abuja today, and is due to announce its decisions tomorrow afternoon. In July it reached a split decision, with six members in favour of no change and two for easing. In the members’ personal statements, more than one member considered the case for tightening to attract offshore portfolio investors (Good Morning Nigeria, 21 September 2017). This week we again expect no change in the 14.00% policy rate on a majority vote.
We have seen one argument in circulation that the committee may be tempted to ease this week because of the decline in core inflation, from 18.1% y/y in December to 12.3% in August. It has some weight because monetary policy does influence core inflation.
The notional reference range for inflation of between 6% and 9%, however, seems on the horizon, and applies to the headline measure for food and non-food items combined. The rate for this measure has declined for seven months in succession with help from positive base effects. This decline has been unspectacular, amounting to less than 300bps in total, and is unlikely to gain momentum until next year in our view.
Among the other arguments for easing, we pick out the putative impact on growth and the government’s borrowing costs. The textbooks tell us that lower interest rates attract new borrowing and so provide a boost to growth. Yet in the Nigerian context the banks may not pass on the full benefit of any policy rate cut to their customers. Further, they lend on scale to a handful of sectors that tend to be capital, rather than labour intensive. Their loans are heavily concentrated on large companies.
The MPC’s exhortations over countless meetings have had minimal impact on the banks’ lending practices. This is unlikely to change for well-documented reasons. A far greater boost, as the committee has routinely argued, would come from labour and other structural reforms, which are the FGN’s and not its remit.
There is a little more merit in our view to the argument for easing for the sake of the government’s borrowing costs. Per the 2017 budget, the FGN’s debt service is projected at about 35% of its revenues. The outturn for the first few months indicated a ratio around 40%, and threatens to increase.
The borrowing costs are more likely to ease through offshore portfolio investment in local currency debt instruments through NAFEX. Last week was highly promising in this respect.