Ahead of the Monetary Policy Committee (MPC) meeting decision tomorrow (Tuesday), analysts in the financial services sector anticipate no change in the key monetary policy stance of the Central Bank of Nigeria (CBN).
With uptick in Nigeria’s inflation rate and fragile economic growth, economists and analysts polled in a BusinessDay survey said it would be best for the Monetary Policy Committee of the CBN to retain interest rate at 14 percent.
Ayodele Akinwunmi, head of research, FSDH Merchant Bank Limited, expects the CBN to hold rates at current levels and to continue to use the sale of government securities to manage price stability in the country. This is based on expectations of increase in the interest rate in the advanced countries and potential drop in the crude oil price and production, which may put pressure on domestic inflation rate and exchange rate.
“In that situation, tight monetary policy will be appropriate. However, weak GDP growth rate and weak credit growth should justify interest rate cut, but that will not address the potential exchange rate and inflation rate pressure,” Akinwunmi said.
“Therefore, the best strategy is to hold policy rates at the current levels and continue to use sale of government securities to manage price stability hoping that crude oil price will remain between US$60-US$70/b so that the external reserves will not be drawn down aggressively,” he said in an emailed response to BusinessDay.
The MPC, which has the statutory duty to manage the central bank’s interest and exchange rate policies, is scheduled to hold its meeting from today, Monday, 21st through Tuesday, 22nd January, according to a statement on CBN’s website.
Henry Ogbuaku, head, asset management at Growth & Develop. Asset Mgt Ltd, suggested that MPC should retain rate, considering a sovereign economy like Nigeria should be more concerned about driving economic growth.
“I do not see them changing the rate for now because of a number of reasons. The macro-economy still requires a lot of support to actualise the growth target that was projected for the year,” Ogbuaku said.
At 14 percent, he said, “the real interest rate is still positive and until inflation climbs to 13 percent, it will not be a major issue for MPC”.
The policy rate has remained unchanged since July 2016, when the committee voted by five to three for a 200 basis point hike to 14 percent in a response that was aimed to fight inflation.
Gbenga Sholotan, head of research at RMB Nigeria, is optimistic that “the MPC will leave the rate unchanged”.
Data from the National Bureau of Statistics (NBS) show that annual inflation hit a seven-month high of 11.44 percent in December 2018, up from 11.28 percent in November.
Nigeria is forecast to grow at 2.1 percent in 2019, according to a report by the UN Secretary-General on the ‘Socioeconomic Trends’ West African sub-region. The country’s economic growth projection is expected to drive the regional growth forecast of 2.9 percent. The country’s GDP growth rate stood at 1.81 percent in Q3 of last year, compared to Q2 figures of 1.50 percent.
“I see members voting for a hold on the policy parameters. The reality is that in spite of the increase in last month’s inflation rate to 11.4 percent, the MPC is not likely to further tighten monetary policy in order not to jeopardise the chances of the ruling party in the coming elections. So, in a way, political consideration will be a major factor,” said Uche Uwaleke, professor of finance and capital markets at Nasarawa State University, Keffi.
“This appears to be the trend in many countries regardless of central banks’ independence. Recall that in the run-up to the presidential elections in the US, the then chairman of the US Fed Reserve was accused by Donald Trump of deliberately keeping the policy rate low to favour the Democratic Party. The point here is that the MPC will be mindful of the current political uncertainties and so will go for maintaining the status quo. Of course, the usual justifications with respect to global and domestic factors will be used to support the hold-rates stance,” he said.
At the last MPC meeting, CBN and its monetary committee decided by a vote of all 11 members to retain the monetary policy rate (MPR) at 14 percent, the asymmetric corridor at -200 basis points, -500 basis points around the MPR, Cash Reserve Requirement (CRR) at 22.5 percent, and liquidity ratio at 4 percent.
CBN Governor Godwin Emefiele explained that to hold is an expression of confidence in the policy regime given the gradual improvement in both output growth and price stability. “On this premise, the forward risk to growth and outside risk to inflation appears contained,” Emefiele said.
Paul Uzum, managing director, Halo Nigeria Capital, said MPC will retain rate as the increased inflation rate was as a result of election spending and the yuletide season, adding, “I don’t see them taking any action now until after the elections.”
“I don’t think the headline warrants any change at all. As inflation expectations remain high, with crucial polls on the horizon, coupled with a desire to support growth, the prudent move, in my view, would be to leave things as they are,” said Rafiq Raji, chief economist at Macroafricaintel.
The naira on Friday sold at N362.79 to the dollar at the Investors’ & Exporters’ (I&E) FX Window and market turnover stood at $583.01 million.
The foreign exchange rate at the interbank market opened at N306.35/306.85 and closed at N306.85/307.35, with a high of N306.85/307.35 and a low of 306.35/306.85 to the US$.
At the parallel market, the dollar traded at N362, while the Pound Sterling and the Euro traded at N463 and N411, respectively.
The naira exchanged at N361 to the dollar at the Bureau De Change segment, while the Pound Sterling and the Euro, respectively, closed at N463 and N411.
On the action taken to stabilise Nigeria’s exchange rate, the CBN governor at the last MPC meeting said the CBN was able to put up foreign exchange management intervening action through the I&E window, which has helped to build the confidence on Nigeria’s foreign exchange market.
Going forward, said Razia Khan, chief economist, Africa, Standard Chartered Bank, “We expect the CBN to tighten policy in concert with reforms that will likely come post-election – either future fuel price deregulation, or a rise in the rate of VAT to a more meaningful level.”
HOPE MOSES ASHIKE & ENDURANCE OKAFOR
