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CBN’s MPC Meeting at Crossroads Today, Tomorrow

The Monetary Policy Committee (MPC) is expected to hold its fourth meeting of the year on the 18th and 19th of July 2022. We expect the Committee to examine the global economy’s health within the context of continued monetary policy tightening by global central banks and the lingering spillover effects of the spat between Russia and Ukraine. In our view, the Committee will likely stress the need to examine the global economy’s health in the near term and how the global central banks would react correspondingly, given that the downside risks to global growth have intensified. On the domestic front, we believe near-term inflation expectations will likely discomfort committee members, given the pass-through impact of elevated global energy prices on headline inflation. Moreover, we expect the Committee to maintain a cautious outlook on the domestic growth pace given the spillover impact of an impending global growth slowdown on the domestic economy amidst supply-side driven domestic inflationary pressures. On balance, we expect the Committee to retain the MPR at 13.0% alongside other monetary policy parameters to allow previous policy actions to permeate the economy. However, we expect the Committee’s tone to be hawkish in the light of the tightening of monetary policy by global central banks and the election spending effect on inflationary pressures.

Domestic Economy Appears to be Maintaining its Stable Growth Path

We envisage that the oil sector’s performance remained underwhelming in Q2-22 as average crude oil production (including condensates) settled lower at 1.39mb/d in Q2-22 (Q1-22: 1.56mb/d and Q2-21: 1.66mb/d) based on the data obtained from the Nigerian Upstream Petroleum Regulatory Commission (NUPRC). Meanwhile, we imagine that the non-oil sector maintained its resilience without significant shocks to the telecoms, financial services and agriculture sectors. Nonetheless, the manufacturing sector’s growth could have moderated in Q2-22, given elevated energy costs with a pass-through impact on the trade sector amidst the unfavourable base from the prior year.

On a balance of factors, we project the economy would grow by 3.49% y/y and 3.48% y/y in Q2-22 and 2022FY, respectively. Consequently, we expect the Committee to be satisfied with the CBN’s accommodative efforts at sustaining the growth trajectory but note the headwinds posed by the lingering Russia-Ukraine conflict and tightening global financial conditions.

Base Effects to Fan Higher Prices in the Near Term

Domestic inflationary pressures remain elevated on account of the (1) lingering food supply-demand imbalance, (2) elevated gas and other energy prices, (3) intermittent PMS shortages, (4) currency pressures, and (5) increased taxes in line with the 2021 Finance Act. Notably, the headline inflation rose by 89bps in June to 18.60% y/y (May: 17.71% y/y) – the highest print since January 2017 (18.72% y/y). Analysing the breakdown provided, we highlight broad-based pressures across the food and core baskets. While food inflation (+110bps to 20.60% y/y) increased to an 11-month high, we highlight that the core inflation (+85bps to 15.75% y/y) is at its highest level since February 2017 (16.01% y/y).

We expect the Committee to express concerns about the rising inflationary pressures even as the Russia-Ukraine conflict and ongoing planting season introduce fresh risks amidst the unfavourable base from the prior year. Furthermore, in its usual practise, we expect the Committee to urge the fiscal authorities to take decisive steps in tackling the structural challenges limiting food production in the country.

Currency Pressures Remain Unrelenting

Dollar shortages persisted since the last policy meeting on 24 May, 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 1.3% apiece to NGN424.63/USD and NGN617.00/USD at the IEW and parallel, respectively, as of 14 July. Meanwhile, inflows to the Investors and Exporters Window (IEW) improved as the CBN’s non-oil export proceeds repatriation rebate scheme appears to be bearing fruit. Specifically, total inflows to the IEW rose by 62.0% m/m to USD1.84 billion in June (May: USD1.14 billion) – its highest level since December 2021 (USD2.42 billion) – though still significantly below the Q1-20 monthly average (USD3.68 billion). The improvement was primarily due to a 70.3% m/m increase in inflows from local players (88.4% of total inflows). Notably, we highlight that inflows from exporters (193.7% m/m to USD1.02 billion) rose to their highest level since the CBN created the IEW, reflecting the impact of the CBN’s rebate scheme to attract non-oil exports. Meanwhile, we highlight that inflows from foreign investors (USD213.60 million vs May: USD181.10 million) remain tepid relative to the pre-pandemic level (Q1-20 average: USD1.28 billion), reflective of FX liquidity challenges and an overvalued currency.

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, albeit at a pace substantially below pre-pandemic levels.

Global Central Banks Remain Committed to Tightening Rates

Since the last MPC meeting in May, global central banks have intensified their interest rate hiking cycles to contain the stubbornly high inflationary pressures. Indeed, the Federal Open Market Committee (FOMC) raised the federal funds rate by 75bps at the June policy meeting – the largest hike since 1994. At the same time, the MPC of the Bank of England (BOE) increased the bank rate by 25bps to 1.25% – the highest rate since January 2009 (1.50%). We highlight common factors provided by both Committees as justifications for increasing their respective key policy rates – (1) elevated inflationary pressures, (2) tight labour market conditions, and (3) risks that inflationary pressures have become more persistent. Notably, with the US CPI print for June rising to a record high of 9.1% y/y and ahead of market expectations (8.8% y/y) for the second consecutive month, the market is currently pricing a 75bps hike in the federal funds rate at the FOMC’s next policy meeting on 27 July.

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 result in capital flow reversals from emerging economies like Nigeria. Nonetheless, we think the Committee will take solace in the CBN’s capital control measures and the last hike in the MPR to mitigate the exodus of FPIs from the economy.

MPC to Keep Rates Unchanged Despite External Pressure

On balance, we expect the Committee to retain the MPR at 13.0% alongside other monetary policy parameters to allow previous policy actions to permeate the economy. However, we expect the Committee’s tone to be hawkish in the light of the tightening of monetary policy by global central banks and the election spending effect on inflationary pressures.

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