MPC Preview: Economic Stability Regains Priority but Policy Options Still Limited

Despite accommodative policies and introduction of quantitative easing across developed and emerging economies, the MPC elected to leave all policy parameters unchanged at its March meeting, which was in no way a surprise. The committee stated COVID-19 is a public health crisis which will undermine any monetary stimulus and time is needed to allow its direct intervention measures to permeate the economy. More importantly, they agreed to allow the pandemic to plateau before deciding on policy measures to support aggregate demand and supply in the recovery phase of the economy.

Since the last MPC meeting, the number of COVID-19 cases have grown astronomically, while the government implemented a full lockdown in some states to limit the spread of the virus. Following the measures adopted to contain the virus amidst breakup in supply chains, we estimate the economy will contract by 1.6% YoY in 2020. With the gradual reopening of the economy and the large informal sector back to work, we believe the pandemic is peaking. As such, we explore possible options available to the MPC to strengthen aggregate demand, assuming we are already at the recovery phase of the pandemic. While we reckon it is necessary at this stage for the MPC to adopt the most accommodative policy to restore the economy and moderate the rate of economic contraction, we do not see any of its traditional policy tools having a material impact at this time given the liquidity squeeze occasioned by the varying sterilization of DMBs funds by the CBN. Given the impact unusual debits have had on system liquidity and overall interbank rates, we believe a gradual refund of excess CRR will have a more positive impact on rates in the interim, but actual lending by DMBs will require a fundamental change in the economic environment and more efficient measures around the LDR. At the end of the MPC meeting, we favor the committee maintaining status quo on key policy rates, especially the MPR as we believe it will do little to support aggregate demand given that LDR has had more significant impact on lending rates.