FRI. 17 MARCH 2023-theGBJournal | The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is expected to hold its second meeting of the year on the 20th and 21st of March.
Suppose the evolution of events in the international and domestic scenes since the last policy meeting is anything to go by, we envisage that the MPC is now at a crossroads of navigating between the Scylla of pausing as risks of overtightening emerge and the Charybdis of hiking too much and watching the economy fall off a cliff.
On the global scene, systemic central banks continue to march on with their interest rate hiking cycle as labour market conditions remain resilient while inflationary pressures remain above medium-term targets, albeit softening. In the domestic economy, the sustained elevated price pressures in February will be a cause of concern to Committee members, more so that the headline inflation is expected to remain sticky in the coming months.
At the same time, the downside risks to economic activities have increased, worsened by the currency redesign drive. Thus, in our view, an optimal choice at this time is to guard against complacency about the domestic economy’s ability to bend without breaking and remain sensitive to data. Consequently, we lean towards a smaller hike, similar to the actions of central banks of developed economies. Accordingly, we expect the Committee to increase the MPR by 50bps and retain other policy parameters.
Local Economy Expected to Remain on a Growth Path, Albeit Slowly
According to the National Bureau of Statistics (NBS), the domestic economy surprised positively, growing by 3.52% y/y in Q4-22 (Q3-22: +2.25% y/y). The growth print was primarily driven by the non-oil sector, reflecting gains associated with the (1) sturdy telecommunication sub-sector’s performance; (2) seasonality effect in agriculture, albeit limited by flooding incidents; (3) manufacturing sector’s return to growth; and (4) improved credit to the private sector. Accordingly, the non-oil sector grew by 4.44% in Q4-22 (Q3-22: +4.27% y/y).
Meanwhile, the oil sector’s contraction moderated to 13.38% y/y in Q4-22 (Q3-22: -22.67% y/y) as crude oil production settled higher at an average of 1.34 mb/d in the review period (Q3-22: 1.20 mb/d). Overall, the economy grew by 3.10% in 2022FY (2021FY: +3.40% y/y).
In Q1-23, we expect crude oil production (including condensates) to average 1.50 mb/d in line with the (1) government’s efforts at curbing crude oil theft and vandalism and (2) restarting of some shut-in oil wells after the pandemic-induced shut-ins. However, we expect the (1) currency redesign drive and (2) election uncertainties to constrain activities in the non-oil sector. Consequently, we have revised our estimates for Q1-23 and 2023FY growth downwards to 1.89% y/y (previously: 2.44% y/y) and 2.70% y/y (previously: 3.02% y/y), respectively.
Overall, we expect the Committee to remain cautiously optimistic that domestic growth will stay on a growth path, albeit at a subdued pace. Hence, the Committee is likely to highlight the need to strengthen output expansion and forestall the reversal of gains recorded so far by slowing down on the pace of rate hikes and maintaining the ongoing monetary and fiscal interventions in critical growth-enhancing sectors.
Inflationary Pressures Likely to Remain Sticky Despite High Base Effects
After the moderation witnessed in December, inflationary pressures rose for two consecutive months, settling at 21.91% y/y in February (January: 21.82% y/y). For us, the persistent increase in price pressures primarily reflects intermittent PMS scarcity and the associated fuel price increases and low food supply exacerbated by restricted access to fertilizer and high conflict incidences. Overall, in February, food prices rose by 3bps to 24.35% y/y while the core inflation moderated by 32bps to 18.84% y/y.
Consequently, we expect the MPC to express concerns about the persistent inflationary pressures, likely attributing it to supply shocks worsened by the PMS scarcity, and electricity tariff increases amid spending relating to the 2023 general elections.
While we envisage the Committee to express a positive outlook on prices as electioneering activities wind down, we expect members to urge the fiscal authority to sustain its real sector interventions and take decisive steps in tackling the contributory legacy factors limiting food production and distribution in the country.
Local Currency Weakness Remains Unabating
Foreign investors remain on the sidelines given the lack of FX reforms, higher global interest rates and weak macroeconomic narrative. In addition, CBN’s FX supply to the different FX market segments remains significantly below pre-pandemic levels. Meanwhile, the demand for the greenback remains high as market players continue to source for FX to fulfil and clear their outstanding obligations. Consequently, the exchange rate settled at N461.09/USD at the official market (IEW) as of 15 March 2023 (24 January: N462.00/USD).
Although the decline in gross FX reserve is likely to be a source of concern at this meeting, we expect the Committee to highlight the need for the apex bank to maintain its periodic FX interventions and intensify its call to the fiscal authorities to amplify their efforts in ensuring higher crude oil production over the short-to-medium term. Accordingly, the Committee will likely reiterate that the CBN should address the pressures on the local currency by boosting the FX supply for productive activities.
Global Central Banks to Remain on Course for Smaller Rate Hikes
The Federal Open Market Committee (FOMC) meeting minutes released on 23 February show that the US Fed now pinned the Federal funds terminal rate just below 5.40%, implying that there is a possibility of a further rate hike beyond the next two FOMC meetings.
Moreover, in his testimony before the Senate on 7 March, the Fed’s chairman cautioned that a 50bps rate hike is on the cards at the March policy meeting and that the ultimate level of interest rates is likely to be higher than previously anticipated given how latest economic data have come in stronger than expected. However, given the developments surrounding Silicon Valley Bank (SVB), the CME FedWatch Tool currently indicates a 70.1% probability of a 25bps hike when the Fed meets on 22 March.
In the same vein, when the MPC of the Bank of England (BOE) raised the Bank Rate further by 50bps to 4.0% at its February policy meeting, it guided that it would adjust the Bank Rate as necessary to sustainably return inflation to the 2% target in the medium term, in line with its remit. Elsewhere, the Governing Council of the European Central Bank (ECB) also provided forward guidance at its February policy meeting. Specifically, the Committee stated that because of the underlying inflationary pressures, it intends to raise interest rates by another 50bps at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy.
Based on the preceding, we believe the persistent hawkish rendition among global central banks will remain a major theme of discussion at this meeting, given the negative spillover of the tight global monetary conditions. Consequently, we think the Committee will be concerned about the negative impact of capital outflows on the external sector, increasing the urge to introduce measures to send positive signals that it is intentional about bringing down inflation.
MPC to Raise the Key Policy Rate Further by 50bps
At the last policy meeting held in January, more members voted for a 50bps increase in the MPR compared to the voting pattern since the interest rate hiking cycle began in May 2022. Also, a glance through the personal statements of the MPC members showed that the CBN Governor was among the four members that favoured a 50bps hike at the last policy meeting.
The key reasons granted by members in favour of a 50bps increase at the last policy meeting include cautious action that returns inflation within tolerable levels and minimises output loss and the need to balance the risks of under-and-over-monetary tightening.
We align with the views of members that favour moderate tightening given that inflationary pressures are expected to remain sticky over the short term while the risks to domestic growth have increased relative to the prior meeting. In addition, global central banks’ tone suggests that they are gradually approaching the end of the interest rate hiking cycle although they cannot rule out the possibility of further smaller rate hikes than market expectations.
Consequently, we think the MPC is now at a crossroads of navigating between the Scylla of pausing as risks of overtightening emerge and the Charybdis of hiking too much and watching the economy fall off a cliff.
Perhaps, an optimal choice at this time is to guard against complacency about the domestic economy’s ability to bend without breaking and remain sensitive to data. Consequently, we lean towards a smaller hike, similar to the actions of central banks of developed economies. Accordingly, we expect the Committee to increase the MPR by 50bps and retain other policy parameters.-Analysis provided by Cordros Research
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