Analysts stick out neck for a hold on rates by MPC

Analysts expect a ‘not-too-different’ decision from what is currently obtainable across various rates ahead of the outcome of today’s Monetary Policy Committee (MPC) meeting, the last to be presided over by Sarah Alade as the acting governor of the Central Bank of Nigeria (CBN).

The MPC meeting, which started yesterday, is the last before Godwin Emefiele, the new CBN governor-designate, takes the mantle of leadership at the apex bank on June 1, 2014.

“The meeting is unlikely to change the direction of policy and as such, we expect key themes to stay stable. Secondary caution may be taken to further curb systemic liquidity to safeguard gains in price stability,” say analysts at Afrinvest.

“Our 2014 9.5 percent estimate still seems conservative, considering the highly anticipated headwinds associated with the campaign season and dollarisation of the economy. In the medium term, we anticipate the current rate may be sustained in the absence of significant deviation in the MPC’s stance during the scheduled meeting,” they add.

Abiola Rasaq, analyst at Associated Discount House Limited, says that given relative stability of the financial system, they expect the MPC to maintain its policy rate at 12 percent with the symmetric corridor of ± 200bps for standing deposit and lending facility rates, while the cash reserve requirement (CRR) on private and public sector deposits should be retained at 15 percent and 75 percent, respectively.

“We expect April inflation to print at 7.7 percent, with a benign outlook through the year (ADH base case scenario suggests peak headline inflation of 8.2 percent by year-end), thus reinforcing our expectation of ‘status quo’,” he says.

“Whilst the positive trend in monetary variables would have influenced the MPC towards an accommodative decision, relatively weak external reserve (13 percent YTD erosion to $38 billion, with notable ‘hot money’ component), soft outlook on crude oil price, stimulus tapering in the United States and rising  political risks on the run-up to elections are downside risk factors to current macroeconomic and financial market stability, thus reinforcing the need to be on guard with a proactively tight monetary policy stance,“ he adds.

At its last meeting which held in March 2014, the MPC chose to cautiously manage the increased demand pressure on the naira. As a result, the committee took a front-loaded approach premised on the expected election-induced inflation hike by increasing the CRR on private sector deposits from 12 percent to 15 percent, analysts observed.

Also, in their view, research and intelligence analysts at BGL plc, led by Femi Ademola, say that given the potent threats to the exchange rate as the price stability anchor in the short term, their conclusion is that the least the committee would do at the meeting is a hold on all indicators.

“We review the short-term developments in the prices, money, financial, and exchange rate environment since the last MPC meeting. In our opinion, the impact of the policy action at the last MPC meeting has been at best benign, as systemic liquidity remains high and exchange rates continue to trade outside the policy band,” say BGL analysts.

“Although the naira exchange rate appears to have stabilised in recent times, having gained albeit slightly, against the US dollar, the demand pressure is yet to abate as the Retail Dutch Auction System (RDAS) weekly sales remain high, with little or no accretion to the foreign reserves. In addition, despite the increase in CRR on private sector deposits by 300 basis points, interbank rates remain low around the Standing Deposit Facility Rate (SDFR) of 10 percent, suggesting that the impact on systemic liquidity has been very low,” they add.

Razia Khan, head of Africa research at Standard Chartered Bank, says although the Nigerian naira has recovered earlier losses, “following increased portfolio investor interest and rising LHS flows, it remains outside of the CBN’s official +/-3 percent band around a mid-rate of 155”, adding that market conditions remain liquid.

“T-bills have rallied. Interbank rates have been persistently close to the lower end of the corridor.  Nonetheless, the naira has appreciated on the parallel market, to a reported 168 from 172 against the USD, suggesting that there is little immediate need for further tightening,” she says.

“For now, with investor interest in Nigeria still healthy, inflation in single digits, and budget execution still reportedly benign, more OMOs may be the preferred response to managing excess liquidity. Bigger policy moves would be justified only with a material change to pressure on the foreign exchange rate.”

Iheanyi Nwachukwu & Hope Moses-Ashike