WED 15 SEPT, 2021-theGBJournal- The Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) is expected to hold its penultimate meeting of the year on the 16th and 17th of September 2021.
As always, the Committee will examine developments in the global and domestic macroeconomic landscape and provide forward guidance on when the overarching objective of price and exchange rate stability will trump its current pro-growth goal.
Over all, we expect the MPC to maintain the status quo on all monetary policy parameters at this meeting.
Here is why:
Analysts at Cordros Research believe the Committee would be cautious with the growth outlook given that the Q3-21 GDP figures like the Q2-21 numbers would be flattered by a favourable base effect from the prior year. Besides, the growth is still uneven, even as the domestic economy remains vulnerable to external shocks. Therefore, the fragile recovery process would induce the Committee to favour standing pat on its monetary policy decisions.
The economy itself is projected to grow by 3.76% y/y in Q3-21 (Q2-21: +5.01% y/y), primarily driven by the favourable base effect from the prior year.
The Nigerian economy sustained its expansion as base effects propelled domestic economic activities to grow by 5.01% y/y in Q2-21 (Q1-21: +0.51% y/y), marking the third consecutive quarter of growth since the pandemic-induced recession in Q3-20.
However, the growth was not broad-based as it was largely concentrated in the Trade (+22.49% y/y vs Q1-21: -2.43% y/y), ICT (+5.55% y/y vs Q1-21: +6.47% y/y) and Utilities (+78.16% y/y vs Q1-21: +8.66% y/y) sub-sectors which contributed 3.21ppts, 0.99ppts and 0.37ppts, respectively to the 5.01% y/y growth recorded during the period.
Meanwhile, growth in the Agriculture sector (+1.30% y/y vs Q1-21: +2.28% y/y) slowed to the lowest since Q2-18 (+1.19% y/y) as persistent security challenges and seasonality effect outweighed the impact of government fiat-led intervention to the sector.
Again, Nigeria’s headline inflation moderated for the fourth consecutive month to 17.38% y/y in July (June: 17.75%), driven mainly by the sustained deceleration in the food basket amidst a favourable base effect from the prior year.
Specifically, food inflation moderated by 80bps to 21.03% y/y in July as the impact of green harvest in the country’s southern parts outweighed the lean season in the Northern region. Meanwhile, the core basket was up by 63bps to 13.72% y/y on account of price pressure witnessed across all the sub-baskets safe for the Health (-7bps) and Processed food (-66bps) sub-baskets.
Given this scenario, the Committee will feel the need to maintain its monetary policy stance to allow its interventions to continue to support recovery in economic activities.
The Committee is also likely to reiterate that the sustained moderation in inflationary pressures is due to the CBN’s intervention to boost output in the critical sectors of the economy.
Going by the slowdown in the Agricultural sector’s output in Q2-21, we expect the Committee to reiterate the need for the Federal Government to step up its fight against insecurity and improve critical infrastructure to make the business environment more conducive.
Meanwhile, Global Central Banks have signalled tapering asset purchases
The Governing Council of the European Central Bank (ECB) has already guided that the pace of monthly asset purchases will moderate, albeit the Council did not provide further details on the tapering schedule.
For us, the reluctance of the Council suggests that uncertainty regarding the evolution of the pandemic could mean that early reduction of asset purchases may undermine the progress made in supporting economic recovery and pushing inflation higher. As such, we think the Council will continue to assess incoming data in the short term and provide factual information on the timing of the complete withdrawal of the pandemic-induced stimulus package at the December meeting.
Similarly, we believe concerns over rising infection rates in the United States and the weak job market data in August will likely make the Federal Reserve kick back providing a timeline on winding down its asset purchases at its September meeting slated for 20th and 21st.
Overall, we believe the MPC will strike a neutral tone on the global economy’s health, and the attendant impact of reduced monetary stimulus on capital flows into emerging markets and exchange rate pressures.
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