High expectation on interest rate cut as MPC meets today

Expectations on the possible cut in the Monetary Policy Rate (MPR), anchor rate on which Central Bank of Nigeria lends to banks, are high as the Monetary Policy Committee (MPC) meets today in Abuja, BusinessDay interactions with analysts, have shown.

They are of the opinion that reducing the rate currently at 12 percent and the cash reserve ratio (CRR), the cash that banks are expected to keep with CBN, also at 12 percent, will enhance their accessibility to cash and subsequent lending to the economy.

The nation’s currency, naira, has been under pressure in recent times at the interbank market. This is due to a resurgence of dollar demand occasioned by increased liquidity in the money market, coming from a large volume of maturing Treasury bills and FGN Bonds, which are now experiencing lower yields.

Consequently, banks and discount houses and other market participants have opted to place their funds with the CBN at 10 percent, rather than purchase instruments at yields that offer little or in some cases no spread.

Deposit facility with the CBN had peaked at N445.4 billion as of March 7, 2013, from an average N285.3 billion in the past two weeks, a development some analysts said the reduction in MPR and CRR will improve the size of loan-able funds at the disposal of the banks.

CBN had maintained the MPR at 12 percent since November 2011, and CRR at 12 percent for quite some time now, making banks to focus on investments in fixed income instruments, which had enjoyed high yields, until late last year.

“I think what the MPC will do is to drop the MPR marginally by about 50 basis points and lower the CRR possibly by about 200 basis points. This action will create more liquidity for the banks, which in the absence of high yielding government instruments will be channelled to real sector risk assets,” says Johnson Chukwu, managing director/CEO, Cowry Asset Management Limited.

Bismarck Rewane, economist/CEO, Financial Derivatives Company, says the market will experience volatility as banks are expected to commence release of their 2012 financials from this week, and the subsequent huge disbursements by both the federal and state governments to herald the 2015 campaigns.

“MPC will shave off 100 basis points off the MPR to 11 percent pa or/and cut the CRR by 1 percent,” Rewane says.

However, Samir Gadio, emerging markets strategist with Standard Bank London, says, “While the CBN has already eased effective monetary conditions as illustrated by the substantially lower OMO cut-off rates over the past 12 months, a cut in the MPR – which would have provided more support for bonds – looks unlikely for now given the current loose federally consolidated fiscal stance, and the increase in the oil price benchmark to USD79pbl in the 2013 budget.

“We suspect the MPC of the CBN will maintain the MPR unchanged at 12 percent at the March 18/19 meeting, and if any hypothetical reduction in the policy rate occurs later this year, it is likely to be only symbolic and designed to show that the central bank is predisposed to support the real economy.”

Usoro Essien, Economic Intelligence & Strategy, Associated Discount House Limited, says: “In view of possible injections of substantial additional liquidity in the 2013 budget and the inclusion of FGN bonds on Barclays index (March 31, 2013) amid current raised liquidity levels, we do not see premise for a cut in the MPR at this point.

“A cut in the MPR would narrow real returns (the spread between interest rates and inflation) and could trigger an exodus of foreign portfolios that have already begun slowing in view of the rebound in the US and Japan’s equity markets.

“It is hence our opinion that the committee may replace the symmetric corridor of ±2 percent with an asymmetric corridor of -4 percent and +2 percent or adjust the band around the exchange rate to accommodate possible shocks from a fall in oil prices.”

 

JOHN OMACHONU