(Greenwich Merchant Bank): The MPC is set to hold its first meeting this year on the 25th and 26th of January 2020. At this meeting, the Committee will assess its existing policies in line with the recent developments in the international space and their implications on the domestic economy.
Our analysis posits that the key parameters would be left unchanged; MPR at 11.50%, Asymmetric corridor at +100/-700bps around the MPR, Cash Reserve ratio (CRR) at 27.50%, and Liquidity Ratio at 30%.
On the global scene, we expect the rollouts of COVID-19 vaccinations will top other emerging developments, bearing in mind its impact on global growth. Already, the IMF and the World Bank are projecting growth should edge up to 3.4% and 4.0% in 2021.
This alongside the achieved stability in the oil market, pandemic-related risks, the just concluded U.S elections, the slew of positive data in emerging markets, particularly from China, should weigh on the Committee’s decisions.
On the domestic front, the Committee would consider several factors such as the heightened level of inflationary pressures, the insecurity challenges, surging Covid-19 cases accompanied by movement restrictions, persistent FX strains, the downbeat PMI data, amongst others. Ultimately, we envisage the committee would strike a balance between stimulating growth and putting inflationary pressures under control.
At the last MPC meeting, the Committee weighed strongly its options of either hiking, or maintaining status quo. In view of spiralling inflation, the Committee felt the appropriate decision would be to tighten its current position, as this should stem inflationary pressures, but at the detriment of stimulating credit growth, particularly to the real sector.
That said, its decision to hold its position came on the heels of the positive results of the Apex Bank’s heterodox policies, which should strengthen the macro-economic environment, and boost productivity across all sectors. In addition, we believe the Committee would further urge the government to diversify its revenue base in face of oil revenue volatility, and lingering effects of the coronavirus pandemic.
Furthermore, the passage of the 2021 budget of NGN13.6trn, if implemented with vigour should enhance growth in the economy, especially due to increased capital spending, that takes c. 30% of the expenditure plan.
In our view, a tightening stance may appear more appropriate to curb inflationary pressures, ensure capital flights are under control, reduce external liquidity shocks, and even attract foreign investors. Still, high inflationary pressures, weak aggregate demand, shrinking job numbers, rising debt levels, and uncertainties clouding the FX environment continues to threaten the strength of the macroeconomic space.
Our premise for a rate hold is based on two factors. Firstly, the burgeoning need to stimulate economic activities and create jobs, in a bid to boost a quicker economic rebound. Secondly, the Federal Government’s need to foster a closer co-ordination of monetary and fiscal policies to accelerate growth in the country.
Thereby, we expect the MPC would retain its current monetary policy stance. We opine that it might take a while for growth to return to its pre-pandemic levels, as domestic demand is set to remain weak. However, a low base effect and an anticipated pick-up in the non-oil sector underpins growth in the positive territory.