By a unanimous vote, the Monetary Policy Committee (MPC) decided to keep monetary policy parameters unchanged (MPR at 13.5%, asymmetric corridor at +200bps/-500bps, Cash Reserve Ratio at 22.5% and Liquidity Ratio at 30.0%) at its meeting held between Monday and Tuesday.
Reasons for MPC’s decision
The MPC’s decision was hinged on the relative stability in the key macroeconomic variables, particularly the Naira exchange rate and inflation trending in line with expectation.
The Central Bank downgraded its growth projection marginally to 2.27% for 2019 from a forecast of 2.28% at their January meeting. The expected growth in the economy will be largely driven by the non-oil sector. The Committee noted that low credit to the private sector, high unemployment rate, among other factors, posed downside risks to GDP forecast.
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Other things considered
However, the continued intervention of the Bank in the real sector is expected to ameliorate the downside risks in the short term while sound fiscal policy is expected to drive growth in the medium to long run. Also, the Committee mentioned that although inflation moderated in June 2019 (11.22% y/y), price pressures could emanate from structural factors such as the high cost of electricity, transport and production inputs.
In arriving at an interest rate decision, the MPC noted that while loosening the MPR at this time could increase money supply, stimulate aggregate demand and strengthen domestic production, loosening could, however, leave the economy awash with liquidity, especially if it drives growth in consumer credit without commensurate growth in domestic output. Hence, by a unanimous vote, the Committee decided to hold all monetary parameters constant.
Our opinion
The CBN will remain committed to ensuring price stability by balancing between controlling inflation, stimulating economic growth and maintaining a sustained inflow of foreign funds to support forex reserves. With the risks to global trade and investment still in play, we expect global Central Banks to act on the dovish signals that are being sent to the financial market before the end of the year as growth in their economies take a hit from trade and geopolitical tensions.
Our projection
A looser monetary policy stance in advanced economies, in addition to a further moderation in inflation in the domestic economy, will leave room for the MPC to lower the MPR before the end of the year. By the September meeting, we expect headline inflation to be around 10.8% giving room for a 50bps rate cut to deliver a real interest rate that is at par with the majority of its EM contemporaries (i.e. c.2%).
The MPC’s interest rate decision was in line with our expectation of a hold. The MPC’s
decision was hinged on the relative stability in the key macroeconomic variables, particularly the Naira exchange rate and inflation trending in line with expectation. They
noted that there is a need to accelerate economic growth as growth in Q1 2019 was sluggish (2.01% y/y) compared to Q4 2018 (2.38% y/y). Likewise, the manufacturing and
non-manufacturing PMI indices have softened since December 2018 pointing to a softening in economic activity.
In June, the readings for both the manufacturing and non-manufacturing PMI indices came in at 57.4 index points and 58.6 index points compared to December’s readings of 61.1 index points and 62.3 index points respectively. Hence, the Central Bank downgraded its growth projection marginally to 2.27% for 2019 from a forecast of 2.28% at their January meeting. The expected growth in the economy will be largely driven by the non-oil sector.
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Other observations of the Committee
Inflation: In the MPC’s underlying inflation assumptions, the Committee observed that headline inflation moderated to 11.22% y/y in June 2019 (May: 11.40% y/y) – though still ahead of the CBN’s upper band target of 9%. The moderation in the headline inflation, in the absence of seasonal events, is associated with the CBN’s continued support of the agriculture sector and the prevailing price stability in the foreign exchange market which has caused food inflation to moderate.
However, the MPC noted that in the coming months, price pressures could emanate from structural factors such as the high cost of electricity, transport and production inputs. The committee anticipated a gradual moderation in food inflation, as food prices retreat with the commencement of the harvest season. The MPC also highlighted the bearish sentiment that has engulfed the equities market- evident by the -10% YTD return on the NSE’s All Share Index (ASI) – which reflects portfolio re-allocation from equities to fixed-income securities.
Economic growth: After careful consideration of the underlying factors, the MPC noted that outlook for the global economy remains mixed with indications of continued softening of global output due to persistent policy uncertainties and sustained macroeconomic vulnerabilities. These are likely to be accentuated by the increasing trade tension between the US and its allies, rising debt levels and geopolitical tensions.
On the home front, the Committee noted that output growth will remain weak (2.27% for 2019) while inflation is projected to come in at 11.37% y/y by December 2019. The Committee’s expectations are however based on favourable oil prices, stable foreign exchange rate, enhanced credit to the private sector, sustained CBN intervention in the real sectors and effective implementation of the Economic Recovery and Growth Plan (ERGP). In arriving at an interest rate decision, the MPC noted that loosening the MPR at this time could increase money supply, stimulate aggregate demand and strengthen domestic production.
This could, however, leave the economy awash with liquidity, especially if loosening drives growth in consumer credit without commensurate growth in domestic output. Hence, by a unanimous vote, the Committee decided to hold all monetary parameters constant while also leaving room for the recently prescribed minimum Loan-to-Deposit Ratio to impact the economy through increased credit delivery to the real sectors.
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Final projection
In our opinion, the CBN will remain committed to ensuring price stability by balancing between controlling inflation, stimulating economic growth and maintaining a sustained inflow of foreign funds to support forex reserves. With the risks to global trade and investment still in play, we expect global Central Banks to act on the dovish signals that are being sent to the financial market before the end of the year as growth in their economies take a hit from trade and geopolitical tensions.
A looser monetary policy stance in advanced economies, in addition to a further moderation in inflation in the domestic economy, will leave room for the MPC to lower the MPR before the end of the year. By the September meeting, we expect headline inflation to be around 10.8% giving room for a 50bps rate cut to deliver a real interest rate that is at par with the majority of its EM contemporaries (i.e. c.2%).
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