November 18, 2021/Cordros Report
The Monetary Policy Committee (MPC) is expected to hold its ultimate meeting of the year on the 22nd and 23rd of November 2021. We expect mixed reactions from the Committee about developments in the global and domestic macroeconomic landscape. On the domestic front, headline inflation moderated for the seventh consecutive month in October amid lingering security challenges. Interestingly, survey results indicate that currency pressures at the parallel market are beginning to dissipate, a stark contrast to the last MPC meeting in September, as speculative activities seem to be abating. On the external front, global systemically important banks have come under increased spotlight following surging inflation, which has prompted fears that the commencement of the tightening cycle may be brought forward than initially expected.
Accommodative Monetary Stance Still Required for Output Growth
Since the last policy meeting in September, we observed that new COVID-19 infections have slowed while there has been an improvement in FX liquidity conditions. On the latter, we highlight that the CBN has stepped up its intervention in the Investors and Exporters Window (IEW), contributing an average of 36.4% to the total inflows between August and October (August-October 2020: 31.4%), following the substantial improvement in the gross FX reserves. Consequently, we imagined that this would have improved business sentiments in the manufacturing sector combined with the recovery in demand.
Our expectation over the rest of the year is for the growth momentum to be sustained, albeit moderately, as the impact of the favourable base from the prior year wanes. As a result, we project the economy would grow by 3.76% y/y and 1.65% y/y in Q3-21 and Q4-21, respectively. Accordingly, we expect the Committee to recommend that the CBN maintain its current interventions to sustain the recovery of output growth, more so that the PMI readings remain sub-optimal. Therefore, we believe the fragile recovery process would induce the Committee to favour maintaining its dovish stance.
Base Effects to Support Further Price Moderation over the Short Term
The headline inflation maintained its descent as it moderated to 15.99% y/y in October – the seventh consecutive month of decline and the lowest since December 2020 (15.75% y/y). The price slowdown was spread across the Food (-123bps to 18.34% y/y) and Core baskets (-51bps to 13.24% y/y).
We think the Committee would attribute the slowdown in food prices to the impact of the CBN’s intervention in the agriculture sector and the primary harvest season amidst the infrastructure and security challenges across the country. Against this backdrop, we believe the Committee will feel the need to maintain its monetary policy stance to allow its interventions to support growth in food supply and, by extension, drive down prices.
Parallel Market Rate Embarks on a Road to Normalcy
Since the last policy meeting in September, the exchange rate remained relatively rangebound (NGN410.00/USD–NGN415.00/USD) at the IEW but touched the NGN420.00/USD level on the 14th and 15th October when it traded at NGN422.07/USD apiece. Notwithstanding, the CBN began selling USD25.00 million to the FPIs at the spot and forward market at the rate of NGN444.00/USD and NGN453.00/USD, respectively. The preceding suggests the CBN has commenced clearing the FX demand backlogs given the substantial inflows from IMF’s SDR and the Eurobond issuance. Our survey result indicates that the Naira appreciated against the US Dollar at the parallel market. Precisely, the Naira appreciated by 6.8% to NGN535.00/USD as of 12th November compared with NGN571.50/USD at the last policy meeting in September. For us, this development is due to reduced activities from currency speculators, leading to offloading of the greenback given expectations that the CBN will improve FX intervention.
Over the short term, we expect the rally in oil prices to support the gross FX reserves in addition to the one-off inflows from the IMF’s SDR and Eurobond facility. Overall, we expect the accretion to the gross FX reserves will comfort the Committee to maintain its current stance as the CBN’s arsenal to defend the Naira is in a strong position.
Global Central Banks have Softened Dovish Monetary Stance
On the policy front, global systemically important banks have given pointers on trimming their asset purchase programme due to rising inflation caused by a rebound in consumption expenditure and supply chain disruptions. Notably, the US Federal Reserve has announced its decision to begin reducing the monthly pace of its net asset purchases by USD15.00 billion (USD10.00 billion for Treasury securities and USD5.00 billion for agency mortgage-backed securities) later this month and by USD30.00 billion beginning in December. As a result, we expect the Fed to wind down its net asset purchases by June 2022 based on the current pace of reduction, paving the way for a possible rate hike in H2-22. Similarly, there are strong indications that the Bank of England (BOE) might hike the interest rate by 15bps at its mid-December meeting in response to persisting above-target inflation. Meanwhile, the Governing Council of the European Central Bank (ECB) has guided that the pace of monthly asset purchases will moderate, albeit the Council is yet to provide full details on the tapering schedule like the US Fed.
For us, the chorus among global central bankers to normalise monetary policy will begin to ignite concerns among the Committee members due to the attendant impact on capital flow reversals and, by extension, exchange rate pressures. Nonetheless, we believe concerns will be tempered by the dual effect of rising COVID-19 infection rates and supply chain disruptions, which may compel global central bankers to push back interest rate hikes.
MPC to Leave Monetary Policy Parameters Unchanged
All in, we expect the Committee to maintain the MPR at 11.5% alongside other monetary policy parameters. However, we expect the Committee to reduce its dovish tone in the light of the growing shift to a hawkish monetary stance by global central bankers amidst risk factors that could reverse the downtrend in domestic inflation.
