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MPC meeting: Balancing negative growth and rising inflation

By on September 22, 2020 0 78 Views

* In few hours’ time, the Central bank of Nigeria (CBN) is expected to announce the outcome/decisions of its Monetary Policy Committee (MPC) meeting to the world. In the report below, analysts at the investment banking group, United Capital ex-ray the expectations from the meeting.

The Nigerian Monetary Policy Committee (MPC) in its fifth meeting in 2020 is currently considering, amongst other things, developments in the global and domestic economy to decide on the next monetary policy action to take.

So far this year, the committee had voted to increase Cash Reserve Ratio by 500bps in its January meeting, reduced the MPR by 100bps in its May meeting and maintained status-quo, leaving the monetary policy rates and other parameters unchanged, in the July Meeting.

Since the July-2020 meeting, most of the concerns remained unchanged or have deteriorated. In the domestic market, inflation continues to track higher, and printed 13.2 percent in Aug-2020- the highest in 28 months, pressure on the local unit and reserves remain unabated, amid widening trade deficit and currency market illiquidity despite the resumption of FX sale to BDCs by the CBN.

Furthermore, Q2-2020 GDP numbers showed a 6.1 percent decline, the largest contraction in three decades, signaling that the economy will slip into a recession by Q3-2020 amid the coronavirus outbreak and the ensuing lockdown.

Yet, oil prices firmed at c.$40/b even as monetary policy authorities around the world maintained an accommodative stance to spur growth.

Despite the recent policy reforms observed in the energy sector, (Subsidy removal, electricity tariff adjustment), we doubt that the Committee will tweak any of the policy variables.

However, we are of the view that the MPC will have to brainstorm on the appropriate policy dosage to apply in other to restore GDP Growth, pullback inflation to below 12 percent, resolve the dislocation between the market rate of interest and real return to attract foreign investment as well as stimulate domestic savings, and lastly, fix the currency market illiquidity which remains the elephant in the room.

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