July 25, 2018/Cordros Report
• On Tuesday, the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) concluded its third meeting of the year, announcing its decision to hold policy tools at current levels – in line with market expectation. More interestingly, the Committee revealed its plan to introduce heterodox market reforms aimed at bolstering the credit flow in the economy. Talk of some subtle quantitative easing (QE)!
• The voting pattern drifted further from the typical, as 7 of the 10 members voted to maintain status quo while the remaining 3 (perhaps belonging to the Friedman school of thought) considered modest tightening (25-50 bps) more appealing.
• Surprisingly, the Committee revisited the longstanding public preference for loosening and considered the likely implication of holding the MPR at 14% since July 2016. For once, the MPC was expressly concerned about the lingering redundancy of the all-important benchmark rate dampening its traditional signaling effect to the market. The relevance of that concern remains debatable.
• Save for the announced reforms, the minutes of the meeting could have easily passed for the communique of the May meeting, reflecting that little or zilch has changed on both global and domestic economic fronts since the Committee’s last meeting. Although, in passing, we would like to highlight (1) the gradual shift in global growth from a synchronized path to a less even expansion across major regions and (2) the progressively intensifying jockeying in the domestic polity.
• As we had expected, the Committee further reiterated its worries over the likelihood of higher inflationary pressure over the rest of the year. In our view, however, the MPC’s fears are somewhat overblown, considering the fact that it is excessively hinged on expected liquidity surfeit, which empirically have inconclusive impact on general price levels.
• Meanwhile, from supply-side perspective, we would expect potential uptick in inflation rate over H2-18, coming primarily from higher food prices amid pressured supply chain (see our inflation projection below). It is difficult to take the impact of currently unresolved security upheavals in the agriculture sector for granted. That is already manifesting in month-on-month food inflation numbers (see chart below). And for more clarity, food inflation accounts for c.51% of the entire CPI basket, and that number excludes imported food inflation – which independently represents 13% of the overall index.