July 2021: MPC to Hold Rates Steady to Support Economic Recovery

July 2021: MPC to Hold Rates Steady to Support Economic Recovery

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The Monetary Policy Committee (MPC) is expected to hold its fourth meeting of the year on the 26th and 27th of July 2021. We expect the Committee to assess global and domestic macroeconomic and financial market developments and provide forward guidance on the timing of a change in monetary policy stance.

Reopening of Economy, Base Effects to Keep Economy on Growth Trajectory
Domestic economic activities continue to expand, albeit slowly, on account of the (1) sustained opening of the economy, (2) increased cross-border activities, (3) lagging impact of government intervention to critical sectors and (4) rally in oil prices. Since the last policy meeting in May, economic activities have continued to improve despite the emergence of a delta variant of the COVID-19 virus worldwide (first spotted in Nigeria on 8th July). Given the impact of lockdown measures on activities last year amidst weak public finances, we do not think the government will rekindle lockdown measures. Instead, we believe efforts will be concentrated on improving vaccination and creating awareness to the citizens on the potential impact of a third wave. On balance, we expect the economy to grow by 3.37% y/y in Q2-21 (Q1-21: +0.51% y/y), primarily driven by the favourable base effect from the prior year amidst a moderate improvement in economic activities. Consequently, we believe the Committee would be cautious with the growth outlook given that the Q2-21 GDP figures would be flattered by a favourable base effect from the prior year. With the domestic economy still vulnerable to external shocks, we believe it would induce the Committee to favour standing pat on its monetary policy decisions.

Base Effects to Remain Supportive of Moderation in Inflation
The magnitude of increase in inflationary pressures continues to moderate, suggesting that the inflation rate for 2021 might have reached its peak in March (18.17% y/y), barring no major shock over the rest of the year. Pertinently, the headline inflation moderated for the third consecutive month to 17.75% y/y in June (May: 17.93%), driven mainly by the high base effects from the prior year. Although food prices remain high, we note that its 45bps moderation to 21.83% y/y in June was the third consecutive month of the moderate increase and the lowest since February 2021 (21.79% y/y). We expect the Committee to attribute the inflation moderation to the CBN’s intervention to the critical sectors of the economy to boost output and improve the supply of commodities. Accordingly, we believe the Committee would 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. Against this backdrop, we believe the Committee will feel the need to maintain its monetary policy stance and allow its interventions to continue to support recovery in economic activities.

Exchange Rate at the IEW to Remain Stable on Increased Intervention
We note that the gross FX reserve has decreased by USD1.12 billion (-3.3%) since the last policy meeting to USD33.17 billion as of 19th July 2021. The decline in the FX reserves is tied to the increase in FX sales to FPIs and manufacturers to meet the growing demand for goods, given the reopening of the economy. Accordingly, the Naira has been stable at the IEW (NGN411.63/USD as of 22nd July vs 25th May: NGN411.56/USD). Notwithstanding, we remain optimistic that the (1) rally in the crude oil prices and (2) expected Eurobond issuance and disbursement of Special Drawings Rights (SDR) by the end of August from the IMF would drive accretion to the FX reserves in the near term. Accordingly, we expect the currency to remain relatively range-bound (NGN410.00/USD – NGN415.00/USD) at the IEW.

Global Economy is Recovering but not in a Synchronised Fashion
As the global economy continues to recover from the pandemic induced slump in the prior year, the spread of new COVID-19 variant and pre-existing macroeconomic imbalances in EMDEs has continued to undermine hopes of synchronised global growth. Though the general administration of vaccines has preserved the reopening of economies, vaccination rates have been uneven among countries and regions of the world. We also expect the Committee to assess the conditions in global financial markets within the context of rising inflation which has prompted fears that systemically important banks will withdraw their accommodative monetary policy. With the renewed spread of delta variant in advanced economies, we believe this would bring some comfort to the Committee that global central bankers’ timing of normalisation of monetary policy may be kicked further down the road.

MPC to Maintain Accommodative Stance on Fragile Economic Recovery
On a balance of factors, we expect the Committee to maintain the status quo on all monetary policy parameters at this meeting. However, we expect the underlying tone of the Committee to be neutral, given the still elevated domestic inflationary pressures and imbalances in the external sector.



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