Post- MPC Reaction: Policy Rates Unchanged Amid Conflicting Monetary Policy Direction

In line with our expectations, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) retained all policy rates at its third meeting of 2019. The Monetary Policy Rate (MPR) was retained at 13.5% with an asymmetric corridor of +2.0%/-5.0%, while the Cash Reserve Ratio (CRR) and Liquidity Ratio were unchanged at 22.5% and 30.0% respectively.  While we recently saw a shift towards monetary easing, the sentiment moderated as only two out of eleven members in attendance voted in support of further cuts to MPR. This supports our reaction to the outcome of the March 2019 meeting where we noted that the marginal reduction in MPR was unlikely to spur an easing cycle. Indeed, in the aftermath, rising inflationary pressures as observed in April 2019 make the case for continued monetary tightening. However, we note that weak economic growth at 2.0% in Q1:2019 made the committee uneasy, hence the outlook for monetary policy still tilts towards easing. Going by the antecedents of the present Governor of the CBN, we expect support for growth to come from intervention funds to the real sector while OMO bills would be used to guide system liquidity and desired yields in the fixed income market.

What Comes After Moral Suasion?
What really caught our eye was the strong, disapproving tone expressed by the MPC in their appraisal of weak credit creation in the banking system and the solutions the committee proposed. The committee persuaded the CBN to put measures in place to boost the flow of consumer and mortgage credit. Similarly, the committee urged the CBN to limit the access of deposit money banks to government securities. We continue to reiterate that weak credit creation reflects the harsh business environment, weak economic growth as well as the CBN ‘s monetary policies which have made yields on government securities very attractive. To buttress our view on sluggish growth, we highlight that the banking system is yet to fully recover from the slowdown in growth since 2014. Hence, system wide non-performing loan ratio is still above the 5.0% threshold of the apex bank. Given the prevailing risks in the economy, we believe banks would continue to take a cautious approach to the creation of credit.

Finally, we note with concern the contradictions of the MPC in its decision making. On one hand, the committee highlights that broad money is running ahead of target and restates the need to maintain price stability. On the other hand, the committee continues to push for increased credit into the economy. Although the committee maintains that growth below potential signals an opportunity to boost credit without implications for inflation, we believe that the weakness in the administration of CBN’s credit interventions and broad constraints to productivity are key downsides.

Outlook and implications for the market
We expect a muted reaction to the outcome of the MPC meeting in the markets considering that it was in line with expectation. The fixed income market continues to attract the interest of foreign portfolio investors, which has led to a moderation in yields. We expect this to be sustained as key central banks in advanced economies have paused further interest rate hikes. The equities market has recently received a boost from the listing of MTN, but investor sentiment remains weak. We believe the lack of reforms and broad economic weakness continue to be drawbacks to an upturn in performance despite cheap valuation relative to emerging and frontier market peers.