Nigeria’s MPC dilemma far from over, as 2017 beckons

More often than not, the Monetary Policy Committee (MPC) of the CBN went into its bi-monthly policy meeting confused on whether to raise benchmark lending rates at a time of weak growth or risk fuelling inflation which accelerated on the back of rising food and energy costs as well as imported inflation.

Rising inflation, however, often took precedence over stimulating credit flow in the economy.

Nigeria increased interest rates by 300 basis points to 14 percent from 11 percent in 2016.

The Central Bank first raised rates in March by 100 basis points to 12 percent from 11 percent, before it raised rates again in July by 200 basis points to 14 percent from 12 percent.

Across sub-Saharan Africa’s top ten economies, Nigeria was second only to Angola, as the country with the most change in interest rates in the period.

Angola raised its rates by 500 basis points while, South-Africa- in third place- increased rates by 25 basis points.

Annual inflation in Nigeria printed 18.48 percent in November, and is about 900 basis points above the CBN’s preferred band of between 6-9 percent.

However, slowing month-on-month inflation is fuelling sentiments of a rate cut in 2017 since the MPC’s view is that the principal drivers of inflation are supply-side and beyond its influence.

Positive base effects will also see inflation rates cool in the year ahead, according to analysts at investment bank, FBN Quest.

“We think the CBN will start to cut its policy rate next year as headline inflation slows on positive base effects with effect from February,” Gregory Kronsten and Chinwe Egwim, analysts at FBN Quest, stated in a note to investors on December 16.

Meanwhile, other analysts have made compelling arguments that external factors such as a recent hike in the US Federal Reserve rate may leave Nigeria with no options but to hike interest rates.

This will be in a bid to ensure that naira assets are competitive and attractive enough for investors.

The United States Federal Reserve raised the target range for its federal funds by 25 basis points rate to 0.5 percent to 0.75 percent, during its December 2016 meeting.

In addition to the US interest rate hike, a Donald Trump presidency the emergence of Trump as the President-elect of the United States and the resultant shockwave in the global bonds market, risk appetite for US and underperformance of Emerging Markets assets.

According to analysts at Afrinvest, global fund managers have interpreted victory of Trump to imply a domestic pro-growth and expansionary fiscal policy agenda in the US and high probability of lower trade relations with emerging markets.

“With these, investors are overweighting US equities (with the S&P index reaching new all-time high), repricing bond yields higher while underweighting Emerging Markets assets – currencies, bonds and equities,” Afrinvest analysts say.

Emerging market sell-offs have deepened as a result of these external factors.

Global funds sold about $11 billion of equities and bonds in Asia’s emerging markets after Donald Trump’s victory in the U.S. presidential election as expectations for his economic policies sent Treasury yields higher and sparked the dollar’s strongest rally in eight years.

India suffered the biggest outflows between Nov. 9 and Nov. 18, followed by Thailand, according to Bloomberg data. The capital flight trims the year-to-date inflow into India, Indonesia, the Philippines, South Korea, Taiwan and Thailand to around $55 billion.

“The impacts of these macroeconomic policy adjustments in the US and uncertainty regarding trade policies could have a definitive impact on global funds flow in subsequent months, putting emerging and developing countries at the risk of further flow reversals and currency volatility,” Afrinvest analysts added.

Assessing Nigeria’s policy rate in the last one year, Razia Khan, managing director, chief economist, Africa global research at Standard Chartered Bank, said “With frequent changes in the monetary policy stance, it is not clear that there is an overall agreement on the kind of policy measures needed to tackle Nigeria’s economic challenges.”

According to Khan, “The key issue is what to do about inflation, which is accelerating. The seasonal moderation in the m/m rate of inflation counts for very little. It’s the big picture that matters. Absence of a more robust framework for tackling FX liquidity issues, inflation will continue to be a problem.”

Emefiele, CBN governor and chair of the MPC, said monetary policies this year have been targeted at taming inflation, adding that “monetary policy alone cannot boost growth.”

Rising interest rates have equated to higher borrowing costs for both the government and the private sector. As a result business activities have been bleak and economic output as contracted in the three successive quarters of 2016.

Ayodele Akinwunmi, head of research at Afrinvest thinks concerns on weakening growth will make it difficult for the CBN to hike interest rates in 2017.

“With the latest GDP contraction, it would be difficult for the Monetary Policy Committee (MPC) of the CBN to justify an increase in interest rate,” Akinwunmi said.

The National Bureau of Statistics (NBS)’s released Gross Domestic Product (GDP) figures for the Q3, 2016 showed that the real GDP contracted by 2.24% (year-on-year) higher than the contraction of 2.06% reported in Q2, 2016.

Faced with a decision to either hike or taper interest rates in 2017, asides hiking or slashing rates, there’s also the option of doing nothing, whi ch wa s what the apex bank did at its last meeting for 2016.

I n f l a t i o n blasted past r e q u i r e d t h r e s h o l d s t h i s y e a r, breaking into double digits in February to 11.4 percent from 9.6 percent in January and has been striding on since then.
The latest inflation report from the NBS shows the tenth successive acceleration in the headline rate, to 18.5% y/y in November from 18.3% the previous month.

This was in line with analyst expectations, as deduced from as a BusinessDay survey.

There was an increase in the core measure to 18.2% y/y from 18.1%. Once again, the highest increase recorded among elements of the core measure was for housing, water, electricity, gas and other fuel prices: they increased by 27.2% y/y in November, compared with 26.9% the previous month, and account for 12.7% of the total index.

The month-on-month increase in headline inflation has now slowed from 2.8 percent in May to 0.8 percent. This trend is consistent with the squeezing of household demand.

 

LOLADE AKINMURELE