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Economic Research
24 November 2015

Economic Report  Monetary Policy
MPC Meeting Preview: A ratification of on-going easing?
Economic Snapshot
October 2015 Inflation Data/Indices Macro indicators point to extended economic fragility
MoM YoY Prev YoY
Headline 0.42% 9.3% 9.4% Today, the Monetary Policy Committee of the Central Bank of
Food 0.46% 10.1% 10.2%
All Items Less Farm 0.40% 8.8% 8.9% Nigeria concludes its two-day meeting amidst an increasingly
Imported food 0.50% 10.6% 10.8%
Energy 0.42% 9.6% 9.7% uncertain landscape globally and in Nigeria. On the external front,
minutes of the October US Fed meeting revealed a swing in favour of
Currency Markets
Latest Daily Chg YTD a rate liftoff by December even as the ECB hinted at possibility of
USDNGN 199.03 0.00% -8.50%
EURNGN 211.71 0.11% 4.32%
cutting rates further to stave off risk of renewed weakness in the
GBPNGN 300.96 0.47% -6.38%
Eurozone. Elsewhere, China cut its policy rate for the sixth time in 12
JPYNGN 162.04 0.04% -6.28%
months, after output slowed to 6.9% in Q3 15, while the BoJ held
Monetary Aggregates – September 2015
(N’bn) MoM YoY
rates, despite its economy slipping back into recession. On the home
M2 18,718 1.2% 11.0% front, though output quickened in Q3 15 (+2.84% YoY) relative to
CPS 18,732 0.5% 6.0%
NCG 2,788 0.9% N/A Q2 15 (+2.35%YoY) non-oil sector growth decelerated for the 3rd
NFA 5,083 -7.5% -34.0%
NDC 21,520 0.6% 34.0% consecutive quarter with the manufacturing sector still in recession
(Q3 15: -1.4 YoY). Furthermore, unemployment rate rose for the
External Position
Latest QoQ YoY fourth consecutive month in Q3 15 to 9.9% (+170bps QoQ). On the
Trade Balance ($’mn) -2,308 NM NM
External Reserves ($’mn) 30,442 -2.8% -17.4% fiscal side, further down leg in oil prices (-9% since the last MPC and
Foreign Debt ($’mn) 10,316 9.0% 10.5%
-22% YTD) amplified revenue strain across tiers of government. The
Growth Data – Q3 2015 FG’s now expects fiscal deficit to double to N2.1 trillion on lower
(N’bn) %of total YoY
revenues amidst increase expenditure, while our analysis of states
Real GDP 17,976 100% 2.84%
Agriculture 4,817 26.8% 3.46% governments show more than half will struggle to meet recurrent
Oil 1,845 10.3% 1.06%
Services 6,014 33.5% 3.76% expenditure. On a positive note, CPI eased for the first time in
Wholesale and Trade 2,920 16.2% 4.40%
Manufacturing 1,776 9.9% -1.43% 11months to 9.3% (-10bps MoM) and naira remained stable at the
interbank even as forex reserves posted modest gains to $30.3billion
Oyekunle Omotayo-Benson (+1% since the last meeting). In all, broadly weak macro indicators
oyekunke.omotayo-benson@arm.com.ng
highlight frailty of the Nigerian economy.

ARM Research

ARM Research Cut in policy rate to affirm inflection point of monetary policy Interestingly. Specifically. ARM Research . The glut has driven sharp contraction across the yield curve to near five year lows as banks scampered for quality outlets in the face of heightened credit risks.2% and 10. Short-term rates and long term rates collapsed 850bps and 450bps from levels obtainable as at the last MPC to 5. the CBN’s policy moves since the last MPC appear to have taken cognisance of this reality. without any single mop-up via its usual route of OMO. respectively an outcome in sync with apex bank’s governor’s call for lower interest rates.000 120 900 110 100 800 90 700 80 600 70 60 500 50 400 40 300 30 May-14 Jul-14 Nov-14 May-15 Jul-15 Jan-14 Mar-14 Sep-14 Jan-15 Mar-15 Sep-15 Source: MoF. Bloomberg. in addition to the N700 billion CRR credit. Despite linking the CRR cut in September to the need to avert potential liquidity squeeze that could be caused by TSA withdrawals.Figure 1: Monthly FAAC (N bln) and oil price ($/bbl) FAAC Brent oil price (RHS) 1. this decision to allow this level of liquidity (over N600 billion daily average) since the last MPC meeting marked the first real signal of a shift in monetary policy to an accommodative stance from the hawkishness of the past 4 years.5%. the apex bank allowed another N850 billion in paper maturity over October and November. the CBN allowed system liquidity to climb to a 2 years summit of over N1 trillion post-TSA implementation in October. For us.

00% 4.00% 14. developments on the fiscal side also support a downward review in MPR. the possibility of the federal government’s doubling expenditure in 2016 raises scope for higher level of borrowings and we believe the FG might see domestic borrowing as a more viable option in a lower rate environment.00% 2.25% on average) that was the lowest since February 2011. CBN. More importantly.00% 16.00% 6. with a cut in monetary policy rate. the DMO took advantage of the low rate environment to sell 40% more paper than planned at marginal rates (10.00% 8. At the November bond auction.00% 12. ARM Research With short-term rates substantially below the MPR. Indeed. Specifically. The tactic already has a precedent.00% 10.00% 18. Furthermore. given that the downleg in market rate is a consequence of the apex bank’s (non-) response to the liquidity build-up. we highlighted the growing harmony between the fiscal and monetary authorities in our Q3 15 Strategy Update and expect the appointment of substantive ARM Research . which essentially commenced weeks ago.Figure 2: Benchmark rates and yields SDF SLF MPR Average T-bill Average bond 20.00% Jun-09 Nov-09 Apr-10 Jul-11 Dec-11 May-12 Oct-12 Jun-14 Nov-14 Apr-15 Mar-08 Aug-08 Jan-09 Sep-10 Feb-11 Mar-13 Aug-13 Jan-14 Sep-15 Source: FMDQ. the CBN’s anchor rate runs the risk of being redundant in the current market environment. amidst waning revenues. we expect the MPC to formalise the accommodative stance.00% 0.

between the authorities.ministers (majority of whom seemed to favour lower interest rates) to drive a firmer handshake. admittedly. Stacking all these factors together. we expect the MPC to hold CRR which. we project a cut of possibly up to 200bps. that would stimulate further downleg in rates. the question. for us. we see persistently elevated system liquidity (over N700 billion as at yesterday) as the real evidence of a change in monetary regime. but the quantum. Balancing the current significant ‘undershoot’ of money market rates relative to MPR against the need to not be too ‘sudden’ with policy changes. On the other hand. but we believe a rate cut could be the confirming signal that the new regime is here to stay. ARM Research . which is unlikely to be the case in the near term. as N560 billion OMO paper is set to mature over the rest of 2015. We think further downward adjustment to CRR will be dependent on thinning system liquidity. In all. is not whether the MPC will cut MPR at this meeting. from weakening macros to depressed market rates and adding the prospect of increasing monetary and fiscal harmony. has been the preferred tool of control in recent times.

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