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CBN has new inflation headache to worry as MPC decides today

The Central Bank’s bet of a 65 per cent loan to deposit ratio for commercial banks to boost lending may be paying off following the modest improvement in economic activities, but it has a tougher headache to worry, which is: higher inflation.
Nigeria’s economy expanded 2.28 percent in the third quarter of the year with improvements seen in the telecommunications, manufacturing and , putting the 11-man committee of the monetary policy in a comfortable situation when it meets today to determine the direction of the flow of credit in the economy, to think of holding the key interest rates at 13.5 per cent or probably loosen it, as it .
On the other hand, the prices at which goods and services are sold in the economy has skyrocket following a protectionist policy by the federal government, shutting the countries land border, in order to curb the effect of smuggling that is hurting its domestic economy.
The trade sector has the highest hit from the policy as the sector dipped further into negative, contracting 1.45 per cent year on year from the negative 0.25 per cent reported the previous quarters.
The inflation rate rose to 11.61 per cent in the month of October, its fastest increase in four months, reminding the apex bank of a 2016 scenario, when a currency devaluation pushed commodity prices to as high as 18 per cent, and tempting members of the committee to vote for a likely increase.
“I expect the MPC to maintain the status quo as I do not see any reason to make the cut or increase the rates or even increase in the wake of higher inflation,” said Ayodeji Ebo, managing director/CEO, Afrinvest Securities Limited
The Central Bank in late last month, barred domestic individual as well as non-bank financial institutions from participating from its N14 trillion OMO market, a move that has forced Pension Fund Administrators (PFAs), second largest players in the market after foreign investors, crowd into N2 trillion treasury bills market.
This has forced yields on the short term securities crash to as low as 10.66 per cent on Monday, according to FMDQ data.
Ebo argued that the committee would apply a wait and see approach on its decision today, to see how the drop in the fixed income rates as incentivised domestic investors as they seek counsel in other investment options.
The decision to “hold”, “cut” or “raise” the rates, could come with a lot of implications for a fragile economy still growing below the population rate, and the Central Bank, would have to see things from all sides.
Increasing the benchmark interest rate would help in controlling spiralling inflation which analyst bet would reach as high 12.5 per cent, to be driven by higher food prices from the yuletide season.
This would help in putting a smile on investor’s faces that have been left with nothing to cheer from the high inflation that has eroded returns on investment. At 11.61 per cent, the real yield in investing in one-year treasury bills stands at (-1 per cent).
On the flip side, increasing the rates would further shrink the ailing economy and will increase further the cost of funds, cutting short the lending improvements seen by the commercial banks to meet up with the 65 per cent loan to deposit ratio by December.
While growth concerns would ordinarily have necessitated another indicative tilt towards dovish orientation, the CBN has largely dampened the need for the measure by adopting unorthodox tactics in boosting system liquidity and achieving the required aim of crashing domestic rates, according to Philip Anegbe, Head of Research, at Cardinal Stone.
“However, it is important to demonstrate to Foreign Portfolio Investors (FPIs), the CBN’s willingness to keep carry trade attractive enough by leaving MPR unchanged,” he said.
Anegbe noted in a response to BusinessDay that he forsee a “hold” in rates as well as other parameters as a downward revision of MPR may send a negative signal to FPIs which could increase the risk to currency outlook given the proportion of outstanding OMO attributable to FPIs.
Since its unexpected cut in the repo rate in March from 14 per cent, a rate it held for over three years, to 13.5 per cent, the Central Bank has maintained all parameters including the CRR at 22.5 percent, Liquidity Ratio at 30 percent and asymmetric window at +200 and -500 basis points around the MPR.
The Central Bank has also stood it’s ground in defending the naira from making it weaken against the dollar though, this has come at the expense of its reserve which as of last Friday, stood at $39 billion from as high as $45 billion in the start of the year.


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