Confronted with the twin problems of tepid economic recovery and stubbornly high Inflation, the Monetary Policy Committee (MPC) voted to maintain the MPR at 11.5% alongside other key monetary policy levers.  However, unlike the March meeting, where there was divergence in the voting pattern, a unanimous decision was reached at this meeting among the Committee members. The preceding indicates that the hawks have now retraced to a more conservative stance. In our view, the unimpressive GDP growth of 0.51% in Q1-21 may have prompted the hawks to align with the broader view of the Committee that an accommodative monetary stance is still required to restore the productive capacity of the economy and bridge the negative output gap.
 
On domestic growth: In line with our expectation, the Committee expressed that the recovery remains fragile given that the GDP growth of 0.51% y/y is still far below the average population growth rate of 2.7%. Therefore, the Committee believed that there is a strong need for the monetary and fiscal authorities to consolidate on administrative measures currently in place to spur economic growth. The Committee also expressed confidence that the economy will remain on growth pedestal over the rest of the year. We align with the Committee given the recent rally in oil prices, continued impact of government intervention on the agriculture and manufacturing sectors, amidst improving domestic demand. Overall, we expect the economy to consolidate on the tepid recovery and forecast a growth rate of 3.37% y/y in Q2-21 with a full-year GDP growth rate of 2.63% y/y.
 
On Inflation: The Committee noted the moderate decline in headline inflation y/y to 18.12% y/y from 18.17% y/y in March, driven by a marginal slowdown in food inflation. The Committee attributed the slowdown in food inflation to the CBN’s major interventions to the various sectors of the economy to stimulate aggregate demand and boost production, particularly to the MSMEs. Accordingly, the Committee expects the inflationary pressure to begin to ease as an improved supply of goods begins to offset the demand. We think the moderation in food prices was due to consumers frontloading food items in March in anticipation of Ramadan-induced price increase in April. Accordingly, we believe the headline inflation will maintain its uptrend in the near term before base effects set in at the second half of the year. Consequently, we look for an average inflation rate of 18.06% y/y in 2021FY (2020FY: 13.21% y/y).
 
On Foreign Exchange: The Central Bank Governor stated that the change in the official exchange rate to the NAFEX rate was necessitated by the fact that government transactions were no longer consummated using the official exchange rate but rather benchmarked against the NAFEX rate. He further reiterated that Nigeria still operates a managed-float exchange rate regime.

Cordros’ View
 
The Committee expressed that they were faced with options of tightening, loosening or maintaining the status quo. On tightening, the Committee acknowledged that while such a policy action will help address the stubbornly high Inflation, it will constrain the flow of credit to the private sector and upset the economy’s fragile recovery. Besides, while tightening will address the monetary components of the inflationary pressure, supply-side constraints (which are the major factors pushing inflationary pressure) can only be addressed by policies outside the scope of the CBN. On loosening, the Committee expressed that although this will complement the government’s efforts in restoring the productive capacity of the economy, it will make it more difficult for the apex bank to achieve its core mandate of price stability. We believe the Committee’s view is justified given the attendant impact of high system liquidity on demand-pull Inflation and exchange rate pressures.

On a balance of factors, the Committee believed a HOLD decision was the optimal decision at this time. The CBN Governor noted that maintaining the status quo will enable previous policy actions to permeate the economy while keeping an eye on global and domestic developments. Although the outcome of the meeting is broadly in line with market expectations, we note that the Governor struck a neutral tone, unlike the hawkish tone at its March meeting. For us, this reflects that the Committee is trying to achieve the competing goals of price stability and supporting economic recovery. As things stand, the future path of monetary policy may be difficult to predict due to the balancing act of the MPC. Notwithstanding, we believe the decision of the Committee to tighten monetary policy will be primarily influenced by its assessment on whether substantial progress has been made in restoring the economy to the path of growth from the pandemic-induced slump in 2020.  In the meantime, we think the apex bank will sustain the use of its administrative measures and secondary “tool box” such as the (1) Naira for Dollar Scheme, (2) CRR debits, (3) Loan-to-Deposit Ratio (LDR) and (4) direct intervention in the agriculture and manufacturing sectors to manage system liquidity, enhance FX liquidity and boost output growth. 
 
Market Impact
 
Fixed Income: Given that the outcome of the MPC meeting is in line with market expectations, we do not envisage any significant changes in the dynamics of the FI market.  Bond investors will continue to trade cautiously, showing a weak appetite for long-dated bonds in the near term. With risks to Inflation still tilted to the upside and the plan of DMO to securitise the Ways and Means Advances still on the cards, we expect investors to continue to demand higher yields to improve inflation-adjusted returns. However, the somewhat neutral tone of the Governor at this meeting may bring some respite to the bear steepening of the NGN yield curve. Indeed, the market will be paying attention to future data on Inflation and the current plan of the FG to secure FCY borrowings to determine the path of monetary policy and the extent of domestic debt issuances by the DMO. 
 
Equities: We expect a neutral reaction from equity investors, given that a HOLD decision is likely to be interpreted as “business as usual”.  Accordingly, we think the market will continue to exhibit a choppy theme as investors keep their gaze on yield movements in the FI market. We expect that income investors will continue to cherry-pick dividend-paying stocks. In contrast, risk-averse investors are likely to stay on the sidelines until positive triggers propel market performance. With the eagerly anticipated MPC meeting out of the way, we believe developments in the macroeconomic landscape and corporate actions will shape the direction of the local bourse.