• Friday, July 19, 2024
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Inflation, dollar pressure drive expectations for ‘hold’ as MPC meets

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The Monetary Policy Committee (MPC) first meeting of the year, which started on Monday, is expected to announce a decision on the benchmark interest rate today with analysts in the financial sector expecting no change in rates.

Most analysts polled by BusinessDay expect the MPC to retain the Monetary Policy Rate (MPR), which determines the flow of credit in the economy, basing their votes on the stubborn inflation, contracted growth and foreign exchange pressure.

They want the MPC to come up with policies that would bring relief to long-suffering Nigerians and investors from the impact of the negative macroeconomic indicators occasioned by COVID-19 pandemic.

The consumer price index (CPI), which measures inflation, accelerated by 15.75 percent in December 2020, a 0.86 percent point increase from 14.89 percent in November 2020, marking the 16th-consecutive uptrend since September 2019 and the highest in 33 months, a BusinessDay analysis shows.

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Razia Khan, the managing director/chief economist, Africa and Middle East Global Research, Standard Chartered Bank, expects MPC to hold rates, given the pressure on inflation.

Nigerian economy slipped into recession – the second since Q2 2016 – after output contracted for the second consecutive quarter. Real GDP shrunk by -3.62 percent in Q3 2020 compared with -6.10 percent in the preceding quarter, according to data from the National Bureau of Statistics (NBS).

Johnson Chukwu, managing director/CEO, Cowry Asset Management Limited, is of the view that the MPC should keep the rates at its current levels.

“So, any attempt to tighten will lead to further economic contraction and it will take a longer time for Nigeria to exit recession. It is not the time when the government can cut or tighten. Being that they cannot go either direction, the most logical thing to happen is that they keep at current levels and will have to wait for the implementation of the fiscal framework to see the impact on a monetary aggregate and then take a second look at their March meeting,” Chukwu said on phone.

Speaking further, he said, “In the first place, you have an inflation rate of 15.78 percent and you have pressure on FX, which is actually recommended that you tighten. But at the same time, you have an economy that is in recession. We have seen the second lockdown in other countries, even within our economy, we have seen the government directing some sectors to close like the entertainment and hospitality industry. You realise that the pressure is coming from the COVID-19. It is still affecting our economy in a very strong manner.”

According to Olalekan Aworinde, senior lecturer, department of economics, Pan-Atlantic University, Lagos, Nigeria is contracting, so efforts will be on how to make sure the economy stops contracting and move to expansion part.

“We expect that interest rate is likely going to be constant. We do not expect more drop in interest rate, because if the interest rate drops the yield that commercial banks are expecting will not happen, rather they will lose more.

“I don’t expect that the MPC will want to reduce the interest rate more. Even if they reduce it, with what we have now – COVID-19, the implication is that economic activities will still not expand. Any attempt to reduce interest rate will affect investors. Until when the pandemic is over that we expect investment to accelerate. We are still going to have more contraction until COVID-19 is over,” Aworinde said.

On his part, Uche Uwaleke, professor of the capital market and president, Capital Market Academics of Nigeria, said the challenge before the MPC would be to strike a balance between supporting economic growth and curbing rising inflation.

This balance of risk, he said, will dictate that the MPC holds all the policy rates in January. Doing so will allow the CBN some more time to monitor macroeconomic response to the present accommodative monetary policy stance before possibly making any adjustment in future meetings of the MPC.

“So, I expect the MPC to maintain the status quo this January. That is, MPR at 11.5%, CRR at 27.5% and liquidity ratio at 30%,” Uwaleke said.

Analysts at Greenwich Merchant Bank Limited posit that the key parameters would be left unchanged.

At the last MPC meeting, the Committee weighed strongly its options of either hiking or maintaining status quo. In the analysts’ view of spiralling inflation, the Committee felt the appropriate decision would be to tighten its current position, as this should stem inflationary pressures, but at the detriment of stimulating credit growth, particularly to the real sector.

That said, its decision to hold its position came on the heels of the positive results of the apex bank’s heterodox policies, which should strengthen the macro-economic environment and boost productivity across all sectors.

“We believe the Committee would further urge the government to diversify its revenue base in face of oil revenue volatility, and lingering effects of the coronavirus pandemic. Furthermore, the passage of the 2021 budget of N13.6 trillion, if implemented with vigour, should enhance growth in the economy, especially due to increased capital spending that takes c. 30% of the expenditure plan,” the analysts said.

According to Emeka Ucheaga, an analyst at Credit Direct, “Interest rates (MPR) cannot directly trigger economic growth, rather it only affects money. Thus, if rates are higher, more people would be induced to channel their funds towards savings because the opportunity cost of money is higher when rates are higher.

“Meanwhile, I don’t think growth would be spurred by manipulating rates now; there are structural issues that require attention such as treasury bill rates and border controls.”

“In our view, a tightening stance may appear more appropriate to curb inflationary pressures, ensure capital flights are under control, reduce external liquidity shocks, and even attract foreign investors. Still, high inflationary pressures, weak aggregate demand, shrinking job numbers, rising debt levels, and uncertainties clouding the FX environment continues to threaten the strength of the macroeconomic space. Our premise for a rate hold is based on two factors.

Firstly, the burgeoning need to stimulate economic activities and create jobs, in a bid to boost a quicker economic rebound. Secondly, the Federal Government’s need to foster closer coordination of monetary and fiscal policies to accelerate growth in the country. Thereby, we expect the MPC would retain its current monetary policy stance. We opine that it might take a while for growth to return to its pre-pandemic levels, as domestic demand is set to remain weak. However, a low base effect and an anticipated pick-up in the non-oil sector underpins growth in the positive territory”.

The meeting which held last in December 2020 was concluded with all the rates unchanged as all members supported the retention of rates in their previous positions.