The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is expected to hold its fourth meeting of the year on the 24th and 25th of July. Following the suspension of Godwin Emefiele, the meeting will be chaired by the CBN’s acting Governor, Folashodun Shonubi. Thus, we think the focus at this meeting will be setting a new tone for monetary policy direction over the next few months, in line with the monetary policy and FX reforms since 29 May. Nonetheless, like previous meetings, we expect the Committee to consider developments in the global and domestic economy since the last policy meeting. On the global scene, systemic central banks are signalling a peak in their interest rate hiking cycles. However, they are leaving the door open for an additional smaller rate hike in the near term. In the domestic economy, headline inflation maintained its upward trajectory, currency pressures remain intact, and there are signs that real GDP growth settled higher in Q2-23 after the cash crunch-induced moderation in Q1-23. Overall, while our baseline view is for the MPC to adopt a HOLD stance at this meeting, we do not rule out a 25bps – 50bps hike in the MPR while retaining other policy parameters.
Domestic Economic Activities Likely Impressed in Q2-23 Relative to Q1-23
The domestic economy appears to have shrugged off the impact of the cash scarcity witnessed in Q1-23 after the Supreme Court on 3 March ordered that old high-denominated notes remain in circulation until the end of 2023. Nonetheless, Q2-23 was majorly characterised by PMS subsidy removal and fiscal and monetary policy reforms, with the likely impact of moderating household consumption in the near term. Overall, we imagine that the non-oil sector’s growth improved in Q2-23 relative to Q1-23 as the cash crunch’s impact subside. Meanwhile, crude oil production (including condensates) averaged 1.38mb/d in Q2-23 – 8.9% lower than the 1.52mb/d average in Q1-23 – primarily due to the strike action-induced production slowdown in April. Based on the preceding, we envisage that the oil sector likely contracted further in Q2-23, albeit lower than the decline in Q1-23. On a balance of factors, we forecast the domestic economy to have grown by 3.11% y/y in Q2-23, higher than the 2.31% y/y growth recorded in Q1-23 but lower than 3.54% growth in Q2-22.
Based on the preceding, and barring any significant economic shocks, we forecast real GDP to grow by 2.92% y/y in 2023E (2022FY: 3.10% y/y). 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 will likely highlight the need to strengthen output expansion and forestall the reversal of gains recorded so far by slowing down on the rate hikes and maintaining the ongoing monetary and fiscal interventions in critical growth-enhancing sectors.
