CBN MPC: Analysts see no scope for monetary policy easing

As the Monetary Policy Committee of the Central Bank of Nigeria begins its two-day meeting today, analysts at Capital Economics and Cordros Capital Limited expect the monetary policy parameters to be kept unchanged.

“We expect the committee to review the domestic and external macroeconomic conditions and financial markets developments since its last meeting in January and provide forward guidance on how it intends to balance the competing goals of price and exchange rate stability,” the Cordros Capital said in a note.

It said the positive GDP outturn in the fourth quarter of 2020 would bring some comfort to the committee that the knock-on effects of monetary and fiscal responses to the COVID-19 pandemic were gradually beginning to yield results.

“Nonetheless, we think the growth’s fragility will remain a significant concern for the committee,” analysts at the Lagos-based firm said.

They noted that despite the partial re-opening of the land borders in December, domestic inflationary pressures showed no signs of respite.

“In our view, the persistent increase is price level has been primarily due to the combined effects of ongoing security challenges in the country, FX liquidity challenges, and poor distributional networks,” they said.

The country’s inflation rate rose from 15.75 percent in December 2020 to 17.33 percent as of February 2021 – the highest in four years.

The analysts said, “Given the prior year’s low base effect alongside the persistent increase in food prices, we think the headline inflation is on track to exceed the 18.72 percent recorded in January 2017, the highest inflation rate since the NBS started the current data series.

“Although a dovish monetary policy contradicts rising inflationary pressures, we expect the committee to reiterate that a hike in interest rate will oppose its current growth mandate, given the adverse impact on the rising cost of borrowing for households, businesses and the government.”

Capital Economics, a London-based economic research company, sees no scope for easing of monetary policy.

It said Nigeria’s recovery would be held back by weakness in the oil sector on the back of OPEC+ production cuts and a slow vaccine roll-out.

“We suspect that in the face of weak activity, policymakers will refrain from hiking interest rates in response to high inflation. The policy rate is likely to stay unchanged at 11.50 percent on Tuesday,” its Emerging Markets Economist, Virag Forizs, said in a note.

He said the country’s headline inflation rate would probably stay high in the coming months.

“But once inflation drops back more markedly, probably in the second half of 2021, we think that the CBN will err towards cutting rates to support the economy,” he said. “The recovery is likely to stay sluggish and, at recent MPC meetings, the focus seems to have shifted away from inflation fears and towards weak activity.”