A Seeming Resistance to Easing

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We comment today on the personal statements arising from the last meeting of the monetary policy committee (MPC) because their release has been timely. We also wanted to see the input from the several new members, and to look for clues as to whether the committee is likely to ease when it next meets on 21 and 22 May. We had expected a modest rate cut when it met in early April, based upon the disinflation over 12 months and the expectations (including our own) that more was to come.                                                                                                       

  • We learn from one statement that house estimates had the headline rate at the “lower double-digit mark” by July. Our own forecasts have the rate than at around 11.0% y/y, driven by positive base effects.
  • When the committee meets later this month, it will have access to the March and April inflation reports. That said, the statements do not give the message that the MPC is eager to ease its stance. There are several mentions of the reference range for inflation of between 6% and 9% y/y as if to say that it is far off on the horizon. Another common thread is the warning of election-related fiscal irresponsibility later this year.
  • At times, members appear almost in denial. So we read that the rate of decline had been “relatively sluggish and sticky” whereas the cumulative fall over the three months to February was 156bps. (It has since accelerated.)
  • We found a consensus that Nigeria needed positive real interest rates to lock in foreign investors, and encourage savings and investment generally. As at February, the policy rate of 14.00% was then 30bps below prevailing inflation.
  • If we use the measure of market rates (such as FGN bond yields), however, investors have taken aggressive positions and not waited for declining inflation to deliver positive rates in real terms.
  • On growth, one member felt that the recovery was “broad-based” although the general feeling was that oil had delivered the exit from recession. Several members singled out the clashes between farmers and herdsmen as a barrier to recovery (and continuing disinflation).
  • The committee was faced with a “trilemma” according to one member (tighten, hold or ease). It did not ease for fear of the impact on inflation, the current account, exchange-rate stability and offshore portfolio flows. To our way of thinking, a rush for the door is not our greatest concern, particularly with UK Brent crude oil settled into a new range above US$70/b. Yields on naira debt instruments still compare favorably with almost all EM competitors.

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