The Monetary Policy Committee (MPC) is expected to hold all rates constant, tackle inflation while consolidating on recent gains in the foreign exchange market as they meet tomorrow and next to review recent happenings in the global and domestic space.
The Central Bank of Nigeria (CBN) – led MPC members are likely to face a choice between raising Monetary Policy Rate (MPR)- the benchmark interest rate at 14 per cent and keeping it on hold.
But analysts predict that MPC will retain MPR at 14 per cent; Cash Reserve Ratio at 22.5 per cent and Liquidity Ratio at 30 per cent as well as retention of the Asymmetric corridor at +200 and -500 basis points around the MPR.
“We hold the view that whilst the economy is at a turning point for a positive growth trajectory, monetary policy needs to be deployed with focus which may require taking painful but critical decisions. On a balance of considerations, we analyse that the MPC will maintain status quo and consolidate on recent gains made especially in improving the liquidity in the foreign exchange market,” Managing Director, Afrinvest West Africa Limited, Ike Chioke said in an emailed report ahead of the meeting.
On the interest rate, analysts believe that despite the moderating headline inflation rate, the CBN will tarry a bit in easing monetary policy due to fragility of the forex market recovery. A monetary easing will likely dampen the stability seen in the Foreign Exchange market which remains the main monetary policy anchor.
The first meeting in the second half of the year is coming against the backdrop of a remarkable improvement in domestic macroeconomic variables although recent developments on the global front offer mixed signals.
Chioke explained that whilst there are calls from the private sector and government officials to ease monetary policy, given the improvements that have been recorded in economic leading indicators, the MPC will likely ignore this call on the ground to continue to attract foreign investor participation and prevent speculations on the foreign exchange market.
Other analysts believed that since the last MPC meeting in May, sustained positive developments have continued to support confidence and signal the economy is at an inflection point.
They forecast the economy to grow 0.7 per cent in the second quarter of this year and estimates financial year 2017 growth at 1.2 per cent.
Also expected is significant improvement in government revenue following increased oil production volumes, which reached peak level of 2.2mb/d after the reopening of the Forcados terminal, presents soft landing for performance of 2017 budget, passed with record capital spending projected to support growth.
Already, Manufacturing and Non-Manufacturing PMI (Purchasing Managers’ Index) readings have already indicated slow but steady recovery in economic activities as the average level for Q2:2017 settled at 52.2 and 52.1 points respectively.
Interestingly, external sector pressures have also eased with banks now increasing daily limits on forex transactions following the CBN’s increased forex interventions as well as the launch of the Investors’ and Exporters’ (I&E) window.
The price level development seems to be the only blot to an otherwise broadly improving macroeconomic story. Driven by high base effect, headline inflation has moderated from a peak of 18.7 per cent in January 2017 to 16.1 per cent in June. However, the pace of deceleration has fallen short of analysts’ expectation in the past five months due to seasonality factor which has led to a spike in prices of food items.
With high base effect now thinning out, headline inflation may trend higher as early as July. The MPC could however take solace in continued moderation in Core Inflation which declined to a 14-month low of 12.5 per cent in June to make a case for the easing cycle to start.
It is also believed that the possibility of further tightening is entirely ruled out given easing external sector pressures, moderating core inflation and downside risk of further increasing already high government borrowing costs.
In the past two years, MPC’s interest rate decisions have lagged market movement, which explains the disparity between short term market rates (as high as 18.7 per cent) and the MPR which is still pegged at 14 per cent.
The 100 basis points interest rate cut in 2015 was preceded by a reduction in Open Market Operation (OMO) /T-bills rates, while the move towards tightening in 2016 lagged similar movement in the yield curve.
Hence, even if there are justifications for easing, the CBN will likely signal this in the primary market for short term securities before making an MPR cut. As it stands, the MPR is redundant as it may not achieve a tightening or easing objective except the CBN signals its objective through market rates.
The currency market continued to witness consistent improvements in liquidity and rates convergence last week.
The CBN also sustained its interventions at the interbank market via Wholesale and Retail SMIS which continued to boost liquidity and confidence in the economy.
On Monday, the apex bank intervened in the forex market, selling $195 million in total – $100 million to the wholesale segment, $50 million to the Small and Medium Enterprises (SMEs) segment and $45 million allocated to the Retail invisibles segment to cater for demand for business/personal travel allowances, school tuition, medical fee among others.
Against this backdrop, naira exchange rate at the official market appreciated 3bps to N305.8 to dollar from the previous week’s close of N305.90 to dollar.
