Nigeria Holds Again

Given the recent outturns for growth and inflation it was no surprise that the Central Bank of Nigeria held the benchmark policy rate at 14% today. But the accompanying statement suggested that the decision to hold was really about maintaining stability in the FX market . The decision was not unanimous and the 6-2 vote in favour of holding with the dissenters favouring a cut opens the door to a possible reduction before the end of the year

Although headline inflation slowed for the fifth month in a row to 16.1% y/y in June, which was lowest print for over a year, it is still way above the 6-9% target. Moreover, food price growth keeps marching upwards towards 20%. The Committee put this down to localised herding and terrorist incidents as well as other "seasonal farming effects". However, another explanation is that it reflects the rise in FX availability over the last year which may have encouraged local food producers to export rather than supply the domestic market. In any case, the Committee seems hopeful for a Q3 turnaround in food price momentum as the proceeds of autumn harvest hit vendors and shoppers.

On the growth front, the MPC was encouraged that the recession was easing but noted the ongoing downside risks including a delay in properly implementing the expansionary budget and a continued pickup in non-oil exports.

Our own view is that GDP momentum will return back into positive territory during Q2 and inflation will continue to weaken, albeit slowly. However, before opting for an easing of monetary policy a majority on the Committee will want to see three things: (i) evidence of a sustained and broad-based pickup in activity; (ii) a turnaround in food price inflation; (iii) evidence that a 25bps cut will not unwind the recent gains in FX stability-particularly in the paralell market. This pieces may well be in place by the next policy announcement on 26 September.