MPC Preview: Balancing FX Stability and Moderating Economic Contraction
Since the last MPC meeting, key economic data revealed the vulnerability of the domestic economy to external shocks and exposed structural issues in the economy. Economic performance data for H1 2020 contracted 2.18% YoY (with Q2 standalone contraction of 6.10% YoY) compared to 2.11% YoY growth in H1 19. While we reckon that the level of contraction over Q2 compares favorably to the rate of decline in advanced economies and even similar emerging market economies (See full report: Gone Deep Enough, Recovery Could Lengthen), we believe the speed of recovery will be much faster in the advanced economies given the series of support provided for businesses with even less casualty relative to Nigeria. Elsewhere, recent upward adjustment in electricity prices and rising PMS/diesel prices due to increasing global crude oil prices are adding more pressure to the inflationary trend over the next couple of months. Also, due to the limited supply of FCY and heightened speculation, the BDC-Interbank rate remains elevated despite the resumption of sales to BDC and intervention sales at the IEW. In our view, the monetary policy imperative of striking a balance between supporting the recovery of output growth and reducing unemployment while maintaining stable prices, have been largely challenged by structural issues in the economy. As such, any policy that focuses on stimulating credit growth alone without a major revamp of the structural bottlenecks in the economy will do little to provide cheaper credit (even credit in itself) to the growth stimulating sectors of the economy. At the end of the meeting tomorrow, we expect between 100-200bps downward adjustment in the MPR, with such move further adjusting the interest rate on savings account lower to 1.15%-1.05%.
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