Analysts see CBN pausing on rate hikes

The Central Bank of Nigeria (CBN) may not hike interest rates at its next meeting scheduled for this month, according to most analysts who predict a pause.
The Monetary Policy Committee (MPC) of the CBN will meet for the fifth time this year in September, with a view to achieving price stability and continue momentum to attract foreign inflows.
Analysts are however of the view that tightening monetary policy would undermine growth in the economy which is already in recession.
Some other said last night that the policy making body might on the other hand decide to vote to reduce the monetary Policy Rate (MPR) as the need to reflate the economy heightens, given the fact that the economy is in recession.
“There is the temptation not to further increase rates due to the economic recession Nigeria is currently experiencing and I expect the MPC to tow this line. Raising rates at this point will be seen as a negative for an economy struggling with growth,” said Pabina Yinkere Head Vetiva Capital Management Limited in an emailed response to questions.
“I believe the MPC will come to terms that inflation is transitory and should begin to decline in February of 2017. However, I will expect monetary policy to remain tight,” said Yinkere.
Bismarck Rewane, chief executive of Financial Derivatives Company (FDC) in the Monthly Bulletin released last night said, “The policy makers might decide to retain status quo on key policy rates to give an allowance for the effect of the last rate increase to kick in. On the other hand, it is more likely that the MPC will vote to reduce MPR as the need to reflate the economy heightens as the country is now officially in a recession.”
Economists interviewed by BusinessDay agree that investors tend to shy away from troubled economies no matter how high the policy rate is raised.
Analysts are of the view that policy makers were able to achieve single headline inflation at the end of 2015 because the economy was in positive growth and the dollar scarcity less severe.
The CBN ramped up its benchmark interest rate by 200 basis points to 14 percent in July 2016, from 12 percent previously held, with a view to curbing inflation.
Nigeria’s economy contracted by 2.1 percent in the second quarter of 2016 after shrinking by 0.36 percent in the first quarter, on the back of lower oil price, according to the National Bureau of Statistics (NBS).
Inflation rate increased to 17.10 percent in July as against 16.50 percent, the previous year, the highest in 11 years.
External reserves as of August 29th were recorded at $25.46bn, which is 3.26% lower than July’s average of $26.32bn. Year to date, the reserves level has declined by 12.15% ($3.52bn). The external reserves level is 26.22% below 2015’s peak of $34.51bn and 17.58% lower than 2015’s average of $30.89bn. After de-ducting forward commitments and arrears, the net external re-serves level is estimated to at $19.96bn .
“In my view, the rise in inflation rate doesn’t call for a hike in interest rate because the month on month figures slowed to 1.30 percent in July from the 1.70 percent the previous period and it may fall below 1 percent by the end of the year,” said Tajudeen Ibrahim, head of research, Chapel Hill Denham Limited.
“If the Central Bank keeps hiking rate each time inflation rises, it will damage the economy, “said Ibrahim.
Nigeria suffered from global drop in oil price by 50 percent since 2014 and a flurry of attacks on oil facilities by militants in the Niger Delta oil producing region further undermined government revenue.
The CBN imposed capital controls by pegging the naira at N197-N199 to a dollar, and this policy hit manufacturers hard as they were unable to source dollars to import raw materials, plants and machinery for the purpose of production.
There was also capital flight as investors sold stocks because of fear of a sudden devaluation of the currency.
The total value of capital imported into Nigeria in the second quarter of 2016 was estimated to be $647.1 million, which represents a fall of 8.98 percent relative to the first quarter, according to the NBS data.
“To the average Nigerian however, the increase of MPR means higher prices of goods and services. This will deepen the inflationary trends,” said Chijioke Ekechukwu, managing director, Bristol Investment Limited.