MPC: Analysts see major policy rates remaining unchanged

As the Monetary Policy Committee (MPC) begins its meeting today to end tomorrow, analysts expect major policy rates to remain unchanged while predicting further devaluation of naira over time, after the installation of new administration.
In the plethora of issues to be considered, the recent pressure on exchange rate, declining external reserves, rising price level and slowing domestic economic growth will likely take the centre stage, Ayodeji Ebo, head, investment research and his team of analysts at Afrinvest said in a report.
Consequently, they voted for the MPC to retain MPR at 13%, public sector CRR at 75%, private sector CRR at 20%, liquidity ratio at 30%, NOP at 0.5% and maintain status quo on exchange rate policy to allow the incoming administration settle down before grappling with any major monetary policy issue.
The committee in the immediate past meetings has taken certain bold policy decisions relating to currency devaluation, Net Open Position (NOP) and the Monetary Policy Rate (MPR) in the light of daunting fiscal and monetary policy challenges. The RDAS (Retail Dutch Auction System) was closed in February 2015 while all demand for FX was directed to the interbank market even as the CBN continues to intervene intermittently at the interbank market to moderate volatility swings.
The analysts noted that since the last MPC meeting that ended on March 24, 2015, performance of the Nigerian financial market has been mixed with a divide between the period before and after the elections that was held on March 28, 2015.
In the fixed income market, average bond yields rose to 15.4% before the elections. However, with the successful conduct and the attendant political risk moderation, bond yields currently trade on an average of 14.5 percent.
The Afrinvest report indicated that financial system liquidity level has been on an increasing trend between the last MPC meeting and now. In March, average liquidity was at N207.9 billion while it declined to N233.2 billion in April. Irrespective of the sustained hawkish policy stance of the CBN, liquidity level has been quite high in May with an average balance of N477.6 billion. Overnight and Open Buy Back (OBB) rates continue the usual oscillatory trajectory in response to the prevailing liquidity levels.
According to the report, the foreign exchange rate at the interbank market has been trading at a tight band — between N199.00/US$1.00 and N199.75/US$1.00 – since March 2015. This is consequent on the elimination of RDAS window and the CBN’s intermittent interventions which shut out liquidity in the market even as demand remains in excess.
The analysts believe the induced stability in the FX market may not be sustainable given the level of external reserves (US$29.7 billion) and reduced prospect for accrual with low level of crude oil prices. The external reserves which has fallen 13.9% YTD can barely cover six months of import.