The monetary policy committee (MPC) closes its latest meeting in Abuja today. 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 nine months in a row on the same basis. It has often argued that both negative developments have been largely driven by legacy and structural factors beyond its control. In the cases of pipeline sabotage and electricity tariff rises, for example, we agree.
Almost as long as we can remember, the committee has called for the harmonisation of monetary and fiscal policy.
At the same time, it likes to stress the limitations on the impact of its monetary policy. A hike would be the classic response to the surge in inflation, and would encourage savings. However, it would add to the FGN’s borrowing costs and very likely slow the recovery from recession. The committee hiked by 200bps to 14.00% in July in a bid to attract departed offshore portfolio investors but the tightening made little impact.
A cut in the policy rate would expose what one member has termed the “oligopolistic” structure of the banks and would not be fully shared with their customers. The CBN governor, Godwin Emefiele, said in Lagos on Saturday that the committee also had to look at rate decisions from the perspective of the lender. This was a reference to banks’ high operational costs, notably power, security and infrastructure.
The MPC’s idea of harmonisation is that it has borne the responsibility for creating macroeconomic order and that the fiscal side must now raise its game: A wish list could include a boost to capital spending, a programme of external concessional borrowing and the more timely passage of budgets.
Given its view that its own ammunition is practically exhausted, we do not see a change in the policy rate until the expected marked decline in inflation next year on positive base effects, We estimate the headline rate at 15.1% y/y in March and 11.3% in June.
On exchange-rate policy, the MPC may well call for time for the liberalisation in June to have the desired impact.
Finally, we note a disappointing trend in the publication of members’ personal statements. We do not see why these explanations of voting decisions are sometimes released as late as the first day of the subsequent meeting of the MPC. The statements should be a useful transmission mechanism for the market and the delays mark a step away from best practice.