CardinalStone Research :  Still status quo

25 July 2017

Good evening

Policy rates on hold

At its meeting today, the Monetary Policy Committee (MPC) voted to leave all policy rates unchanged - the benchmark interest rate (MPR) at 14% (with the symmetric corridor around the MPR retained at +200bps/-500bps), the Liquidity Ratio (LR) at 30% and the Cash Reserve Requirement (CRR) on deposits at 22.5%.

Committee's considerations and outlook

The Committee holds expectations of a fragile recovery for the domestic economy in the near term, with the opinion that to sustain the current traction in recovery, bold monetary and fiscal measures will need to be pushed through. Thus, the Committee is looking to continue in its efforts at maintaining the stability in the forex market, and expects that improved non-oil fiscal receipts from agriculture, manufacturing, services and light industries will be pursued relentlessly by the government. However,the slow implementation of the 2017 budget - and consequently a potentially sluggish recovery in growth and employment, worried the Committee. The Committee expressed satisfaction with the consistent decline in domestic inflationary pressures, noting the substantial base effect (which the Committee noted will wane completely by August), the continuous improvement in the naira exchange rate (particularly the convergence in rates at the bureau-de-change and NAFEX* segments) as well as improved foreign inflows (the Central Bank recorded a 35.4% MoM increase in foreign exchange inflows and a 12.7% MoM decrease in outflows).

In discussing the options available, to hold or ease, the Committee emphasized the need for cautious optimism despite the overall positive outlook for the economy. In the Committee's opinion, although easing would signal its commitment to growth, the risks may far outweigh the benefits given that real returns may revert to negative and inflationary pressures may resurface. On the case for a hold, the Committee sees the need to safeguard the current stability achieved in the forex market and to allow time for past policies to work through the economy effectively.

Market reaction - our expectations

Markets had held expectations of a status quo decision by the MPC and thus we do not foresee major reactions in the equities and fixed income markets. We believe stock trading will be dictated by the quality of company earnings released in the course of the ongoing earnings season while fixed income yields will largely remain impacted by the actions of the CBN with respect to its sale of OMO & T-bills.

*NAFEX - Nigeria Autonomous Foreign Exchange

Analyst Certification

As to each security or issuer mentioned in this report, the respective primary research analyst(s) covering that security or issuer hereby certify that their views about the issuers and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report.

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