The Argument for No Change from the MPC

• By FBNQuest Analysts

The monetary policy committee (MPC) holds its latest meeting today and tomorrow. In the earlier days of the COVID-19 pandemic rate-setting bodies globally were in easing mode and eager to provide a monetary stimulus. Indeed the MPC cut its policy rate twice in 2020. The most common decision has since been ‘hold’ although a few in the EM universe such as Turkey have shifted to a tightening stance. A third rate cut would be a surprise this week, given the persistent rise in inflation for 18 successive months.

The committee argued in January that easing would increase negative real interest rates. This argument has since been reinforced. The risk from tightening at the time was that it would add to borrowing costs, and thus undermine efforts to restore growth and support job creation. The MPC opted then for a ‘hold’ decision and is likely to do so again this week.

Since January we have had the pleasant surprise of a return to GDP growth in Q4 2020, albeit a modest 0.1% y/y. Our take is that we cannot ignore the possibility of a negative figure in Q1 ’21 (Good Morning Nigeria, 19 February 2021). The authorities, however, are likely to view the pleasant surprise as the beginning of a rebound in output.

As the rebound gathers momentum, the committee argued, the negative output gap closes and inflationary pressures ease. We should say that many of these pressures are supply-side or, to use the MPC’s terminology, “legacy structural factors”. Poor roads and insecurity in growing areas, for example, are not quickly solved.

Since January we have also had the latest labour market report from the National Bureau of Statistics. The increase in the unemployment rate to 33.3% in Q4 ’20  is another reason not to tighten: job creation is enough of a challenge without a rise in borrowing costs. If we take together the unemployment rate and Nigeria’s strict definition of the underemployment rate, we come to 49.2% for Q4.

If, as the MPC appeared to feel two months ago, a rebound in output was underway (before the national accounts for Q4 ’20), then the labour market report is a reason for another ‘hold’ decision.

The global economic landscape has become more Nigeria-friendly. The recovery of the Chinese economy has continued, the oil price has firmed thanks largely to Saudi output restraint, the US Congress has approved the USD1.9trn stimulus package of the Biden administration and the rollout of vaccines has been impressive in some advanced economies. We will be curious to see the committee’s view on the impact of the improvements on the Nigerian economy.

The MPC tends to comment sensitively, if at all, on the fx regime. There is, of course, a large overlap between committee membership and the most senior ranks of the CBN. That said, we cannot see evidence that the CBN is having second thoughts on the naira exchange rate(s).

Some of our counterparts, particularly those employed by large international banks, argue that the CBN is making its way back to policy orthodoxy. We think otherwise, and recall that the head of monetary policy was contradicted by the governor earlier this month for suggesting that OMO bills would again become tools for liquidity management and nothing more.

If we are searching for more evidence of the CBN’s heterodoxy, we need look no further than its burgeoning role in development finance. By January the CBN had already disbursed NGN2trn in its credit response to COVID-19.