The Central Bank of Nigeria (CBN) will need to adopt a wait-and-see approach in its monetary policy decision as the two-day Monetary Policy Committee (MPC) meeting begins today, according to financial analysts polled by BusinessDay.
The analysts expect the CBN to maintain the Monetary Policy Rate (MPR) at the current level of 13.5 percent at the end of the meeting on Tuesday, on grounds of inflation rate and imminence of the new minimum wage implementation.
“We expect that the MPC will adopt a wait-and-see approach and hold the current rates at its 20-21 May 2019 meeting,” said analysts at FSDH Research, an arm of FSDH Merchant Bank.
The CBN in the last meeting of its MPC on March 25-26 cut its benchmark interest rate to 13.5 percent, from 14 percent it had maintained since July 2016.
“We expect the MPC will maintain status quo and assess the impact of the last rate cut. In addition, more emphasis will be to advise government to implement policies that will spur growth and generate employment,” Ayodeji Ebo, managing director, Afrinvest Securities Limited, told BusinessDay in an emailed response.
The analysts say they expect no change partly because of inflation rate, which is one major pointer to the direction the MPC may go.
For the first time in 2019, inflation rate rose in April to 11.37 percent, from 11.25 percent in March.
“The rise in inflation is an indication of inflationary pressure and suggests that the MPC adopts a cautious approach and maintains rates,” said FSDH Research analysts headed by Akinwunmi Ayodele.
Analysts at Cowry Asset Management Limited expect inflation rate to further move upwards in the months of May and June amid Ramadan festivities and the recent signing of the new minimum wage bill.
“Given the imminence of the new minimum wage implementation, we expect the MPR to be kept on hold, cautiously,” said Razia Khan, chief economist, Africa, Standard Chartered Bank.
“We expect new easing from September which will hopefully be supported by a lower inflation profile. The next cut could come sooner if inflation improves, but this seems doubtful in the very near term,” Khan said.
On the money supply side, data from the CBN shows that broad money supply (M2) and credit to the private sector are currently below the target for the year.
Folashodun Shonubi, deputy governor, operations, CBN, noted in his personal statement at the last MPC that broad money supply (M2) contracted by 1.98 percent in February 2019, relative to its level at end-December 2018, reflecting largely the 7.74 percent decline in net foreign asset (net). Net domestic credit, however, grew by 1.68 percent, on account of respective rise of 17.20 percent and 6.41 percent in both credit to the government and credit to the private sector.
CBN bills held by money holding sectors also grew by 31.40 percent, thus growing the broader measure of money supply (M3) by 4.31 percent over the level at end-December 2018.
The underperformance of money supply supports the argument for an expansionary policy in order to stimulate credit creation. FSDH Research reiterates that the current structural issues in the economy do not support strong growth in credit. Measures that remove the inherent risks in the economy will be required to stimulate credit creation.
There has been stability in the foreign exchange market due to increases in oil prices and production as well as the interventions by the CBN.
However, there was a significant drop in capital importation via Foreign Portfolio Investment (FPI) in the Investors’ and Exporters’ Foreign Exchange Window (I&E window) in April 2019 compared with record highs in March 2019. This may be a reflection of the declining yields in the fixed income securities market. A further cut in rate could lead to lower yields, which could result in capital flight in the economy and hamper economic performance. As a result, a hold decision on the MPR seems more appropriate.
Nigeria’s external reserves rose by 4.41 percent to $45.0 billion as at May 16, 2019, from $43.1 billion as of January 15, 2019, data from CBN website show.
The production cut by the Organization of Petroleum Exporting Countries (OPEC), insecurity in Libya and sanctions on Iran and Venezuela continue to drive up the price of crude oil, which rose to its highest level in April since the beginning of the year. The price of Bonny Light rose as high as US$77/b.
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