WED, 21 SEPT, 2022-theGBJournal| Again, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is faced with the decision of holding or hiking the Monetary Policy Rate (MPR) further at a time global central banks are marching on with their interest rate hiking cycle despite the increasing risks to growth.
When the Committee meets on the 26th and 27th of September, we expect it to assess the domestic and global economic environment, specifically the key economic and financial indicators since its last policy meeting. In our opinion, the Q2-22 growth print (+3.54% y/y) suggests the Committee could become cautiously comfortable with the growth levels, giving it a much-needed reason to maintain its fight against the stubbornly-high inflationary pressures, more so that a sustained negative real interest rate could dampen domestic investments and undermine the stability of the local currency.
Moreover, the more hawkish rendition from global central banks also supports the Committee towing the same path to reduce external pressures. Thus, we think further tightening is necessary to anchor inflation expectations. Consequently, we expect the Committee to (1) increase the MPR by at least 50bps and (2) adjust the asymmetric corridor back to its pre-COVID level (+200/-500bps) from +100/-700bps around the MPR.
Economic Growth Maintains Solid Momentum
In line with our expectations, the domestic economy maintained its positive growth trajectory for the seventh consecutive quarter as real GDP grew by 3.54% y/y in Q2-22 (Q1-22: +3.11% y/y). On the one hand, we highlight that the oil sector (-11.77% y/y vs Q1-22: -26.04% y/y) contracted at a slower pace compared with Q1-22 despite crude oil production (including condensates) settling lower at 1.43mb/d (Q1-22: 1.49mb/d).
On the other hand, the non-oil sector (+4.77% y/y vs Q1-22: +6.08% y/y) maintained its growth trajectory, albeit at a slower pace, supported by the sustained growth in (1) telecoms subscribers, (2) reopening of more land borders for trade, (3) sustained fiat-led interventions and (4) commercial banks’ expansion of their loan books amid the sustained improvement in the economy. Consequently, the ICT, Trade, Finance & Insurance, and Transportation sub-components primarily drove the non-oil GDP growth.
We expect the non-oil sector to remain the overall growth engine over the short term, though smoothening base effects could ensure growth moderates. In addition, we expect the oil sector to maintain its contraction as crude oil production remains low.
Accordingly, we revise our growth estimate for Q3-22 upward to 2.90% y/y and expect the 2022FY growth to settle at 3.01% y/y. Consequently, we expect the Committee to be satisfied with the CBN’s unconventional monetary interventions in the real sector to sustain the growth trajectory but note the headwinds posed by the lingering Russia-Ukraine conflict and tightening global financial conditions.
Price Pressures to Maintain Uptrend in the Short Term
Domestic inflationary pressures maintained their uptrend as the headline inflation increased by 88bps to 20.52% y/y in August (July: 19.64% y/y) – the highest print since September 2005 (24.32% y/y). On the one hand, food inflation rose to its highest level since October 2005 (24.56% y/y), increasing by 110bps to 23.12% y/y (July: 22.02% y/y), driven by the low statistical base effect from the prior year amid the lingering existing challenges impeding food production and supply. On the other hand, core inflation notched higher by 94bps to 17.20% – the highest print since January 2017 (17.87% y/y).
We expect the Committee to remain concerned about the persisting inflationary pressures even as the primary harvest season is underway amid high input and fertilizer costs. Thus, we expect the Committee to urge the fiscal authority to sustain its real sector interventions and take decisive steps in tackling the structural challenges limiting food production in the country.
No Respite Yet for Currency Pressures
Pressures on the local currency have remained unrelenting, given limited FX supply at the official channels amidst increased FX demand underpinned by summer travels and political activities. Accordingly, we understand that travellers and manufacturers have continued to recourse to the parallel market as most of their FX needs remain unmet at the official windows. Consequently, since the last policy meeting, the local currency depreciated by 2.8% to NGN436.25/USD at the Investors and Exporters Window (IEW) and by 12.3% to NGN709.00/USD at the parallel market as of 16 September.
Meanwhile, after reaching a six-month high in June, inflows to the IEW declined for the second consecutive month to USD931.20 million in August (-29.9% m/m vs July: USD1.33 billion). We highlight that the decline was driven by low inflows across the local (-31.8% m/m) and foreign (-17.4% m/m) sources. Notably, the inflow from the CBN (USD51.10 million vs July: USD93.0 million) is the lowest since March 2021 (USD6.4 million).
Elsewhere, the gross FX reserves depleted by 1.9% to USD38.69 billion (as of 15 September) since the last policy meeting, reflecting CBN’s sustained FX interventions, albeit significantly below pre-pandemic levels, more so that inflows to the reserves have been limited.
On balance, we expect the gross FX reserves at current levels to comfort the Committee that it has enough liquidity to maintain periodic FX intervention, though at a pace substantially below pre-pandemic levels. Nonetheless, we expect the Committee to admit near-term vulnerabilities in the external sector as pressures on commodities and fuel prices exacerbated by the lingering Russia-Ukraine conflict intensify.
Global Central Banks Remain Committed to Tightening Rates
It appears global central banks are not backing off with their aggressive tightening cycles, given the unabating inflationary pressures. For example, the US Fed chairman at the Jackson Hole Symposium on 26 August highlighted that he expects the Fed to continue raising interest rates and hold them at a higher level until inflation moves closer to its 2.0% long-range goal, even if unemployment rises. Indeed, the Fed is set for its next policy meeting on 21 September, with a rate hike of as much as 75bps pencilled into consensus estimates.
At the same time, the market expects the MPC of the Bank of England (BOE) to increase the bank rate further by at least 50bps when it meets on 22 September. Moreover, in line with its previous guidance, we expect the Committee to pass a confirmatory vote to start selling the UK government bonds held in the Asset Purchase Facility (APF) shortly after the meeting. Elsewhere, the Governing Council of the European Central Bank (ECB) increased its key policy rates by 75bps at its September policy meeting and expects to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations.
Overall, we believe the hawkish chorus among global central banks will be a major theme of discussion at this meeting, given that tighter global financing conditions could induce investors to “retreat” and eschew opportunities outside the advanced economies. 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 Could Increase MPR and Adjust the Asymmetric Corrido
All told, we expect the Committee to (1) increase the MPR by at least 50bps and (2) adjust the asymmetric corridor back to its pre-COVID level (+200/-500bps) from +100/-700bps around the MPR, given the continued hawkish rendition of global central banks amid a comfortable level of domestic growth and persistent inflationary pressures.-Analysis is provided by Cordros Research
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