In line with our expectation, the Monetary Policy Committee (MPC) of the CBN maintained status quo on all policy rates at the meeting which ended the 26th November 2019. It was a unanimous vote that kept the Monetary Policy Rate (MPR) at 13.5%, the asymmetric corridor around the MPR at +200bps/-500bps, Cash Reserve Ratio (CRR) at 22.5% and liquidity ratio at 30%.
In its post-MPC briefing, the CBN noted that the choice of the committee remained limited. Hiking rates, in recognition of increased upside risk to inflation and mounting external sector pressures would further constraint economic growth; while a rate cut is likely to intensify risks to NGN stability resulting in increased capital outflows.
Pressure points highlighted, the MPC opted to retain policy rates, reflecting its desire to sustain the fragile economic recovery through private credit expansion. Private credit growth improved slightly to 13.08%yoy in October from 12.49%yoy in September, while credit to government declined in October to 85.99%yoy from 114.79%yoy in the previous month.
We interpret the unanimous holding voting pattern as a confirmation of the CBN strong pro-growth bias in line with the recent CBN policies to lower interest rates and bolster non-bank domestic liquidity. Through its recent decisions, the CBN clearly revealed its willingness to support the economic recovery by reducing the arbitrage opportunities available to corporate borrowers and shrinking the size of its balance sheet without impacting foreign investors.
Although GDP growth surprised positively in Q3 2019 at 2.28%yoy from 2.12%yoy in Q2, supported by higher oil production and recovery in agriculture, momentum remains fragile and the medium-term outlook is still constrained by persistently weak macroeconomic policy environment and we see little room for the economy to expand above 2.5% in the short-term.
Headline inflation accelerated by 36bps to 11.61%yoy from 11.24%yoy in September on the back of food price pressures resulting from the negative feedback effect of the partial land border closure. We think the upside risk in price index remains elevated due to the extension of the partial land border closure till at least January 2020, scheduled increase in electricity tariff (by 30%) in January 2020 and increase in VAT (by 2.5 percentage points to 7.5%) in the same year.
Furthermore, we remain concerned by the minimum wage implementation and the adjustment in the exchange rate for computing duty on imports. Therefore, we retain our forecast of no change in MPR in the short-term and we see scope for further support of economic growth via liquidity management. This is premised on the strong reliance on OMO tool by the CBN rather than the less effective MPR.
From external sector standpoint, the current account balance is expected to deteriorate reflecting drags from rising payments for services. Additionally, trade surplus is likely to decline due to increasing imports as relatively stable Naira will continue to stimulate non-oil import demand, coupled with weaker trade activities as a result of the closure of Nigeria’s land borders against foreign trade.
Increased FX interventions have come at the cost of depleting external reserves (down 7.5%YTD to USD39.3 billion last week). Therefore, we expect the NGN to remain vulnerable to external financing conditions as the CBN continues to rely on FPIs carry trade in short-term OMO bills for funding deficit in the current account and stabilizing the external sector.
In 2020, we anticipate trade uncertainty to alleviate and global accommodative stance to subsist, softening the aversion for risky assets and supporting foreign flows in the local bond market. Therefore, the short-term yields outlook for H1 2020 could replicate the H1 2019 movements. Decrease in short-dated securities supply and more-dovish outlook on CBN liquidity management in a context of stable currency and rising FPI interest give room for further moderation in the short term interest rates. Against this backdrop, we expect investors to unwind long-duration positions next year due to current account imbalances, leading to a steepening of the yield curve and wider maturity spreads.