Economists Seek Rates Retention As MPC Meets

Lagos – As the 254th meeting of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) begins today in Abuja, there are indications that the meeting will hold rates as Nigeria battles its worst economic woes in two decades.

Economists and analysts believe that the committee may not tamper with rates for now while the nation waits for the unveiling of the economic blueprint by President Muhammadu Buhari in February.

At its November 2016 meeting, the MPC maintained the Monetary Policy Rate (MPR) at 14 percent with the asymmetric corridor at +200 basis points and -700 basis points; retained the Cash Reserve Requirement (CRR) at 22.50 percent and Liquidity Ratio (LR) at 30 percent.

Experts at FSDH Merchant Bank believe that despite the fact that the inflationary pressure and weak exchange rate justify a rate hike, it may be a difficult policy given the need to implement policies to boost growth in the economy.

“We expect the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to hold rates at the levels. The CBN will continue to use the Open Market Operations (OMO) to manage liquidity to achieve the desired goals in the short-term. Looking at the economic developments in the country and the impact of the external developments on the Nigerian economy, we expect the MPC to hold rates at the current levels.

“If the peace in the Niger Delta region is maintained, oil output may increase. This will increase exports and inflow of foreign exchange. The need for the Federal Government Nigeria (FGN) to borrow aggressively may reduce and interest rate and inflation rate may drop. All these may take a couple of months to happen”, they said.

Dr. Biodun Adedipe, Managing Director, Biodun Adedipe and Associates, said with the current improvement in oil prices and the effect on the upward movement of the country’s external reserves it will be expedient for the committee to watch and see what will happen before it adjusts the rates.

The International Monetary Fund (IMF) has stated that economic activity is projected to improve in 2017 especially in emerging market economies.

The IMF estimates Gross Domestic Product (GDP) contraction in Nigeria in 2016 at 1.5%, but to grow by 0.8% in 2017.

Razia Khan, Chief Economist and Managing Director, Global Research, Africa, Standard Chartered Bank, noted that “the absence of any further policy measures on FX liberalisation suggests that the CBN will be quite comfortable keeping interest rates on hold at next week’s MPC meeting.”

She said “although inflation has been pressured higher, further tightening would be more plausible if there was some expectation that it might trigger a positive response from offshore portfolio investors, and bring about greater FX inflows. These plans look to have been put on the backburner for the moment”.

Specifically, she said, “Despite weak growth, we do not think that the CBN will cut rates.”

“Inflation in year on year terms is likely to remain elevated for a while still. There is also some disquiet about the recent spike in money supply, and how much of an inflation threat it represents. The CBN may well have to wait for evidence of a pronounced base effect driving y/y inflation down, before it can think about easing policy”, Khan added.

Meckson Aniegbe, Chief Executive Officer, Random Tools, a firm of financial advisors, said the MPC should be interested with how to tackle inflation headlong in 2017.

“I think the MPC will be so busy this year. It will look at ways of tackling economic issues more than ever before. 18.6 percent inflation is at a 10-year high. It is also likely that 2016 Q4 GDP growth will close around -2 percent in negative territory.

“Since there is a strong historical correlation in Nigeria between positive GDP growth and lower rates of inflation, the MPC will have to adapt inflation reduction policies to expect positive GDP growth in 2017”, he noted.

Matthew Ogagavworia, a Lagos based analyst, affirmed that a hold decision will be appropriate as there is an improvement in Nigeria’s economic outlook because of the increase in oil output and the impact of the supply cut by the Organisation of Petroleum Exporting Countries (OPEC).

Experts at FSDH are also of the opinion that as the inflationary pressure still persists in Nigeria, they expect the January 2017 inflation rate to increase further from the December 2016 figure.

The inflation rate increased in December 2016 to 18.55 percent, from 18.48 percent in November 2016.

“The inflation rate in the medium term would be driven by the base effect from previous higher prices, expected good food crop harvest and, possible increase in electricity tariff and pump price of premium motor spirit (PMS). Given the outlook of inflation rate between now and the next MPC meeting, a rate cut will be counter-productive.

“The external reserves increased consistently after the last MPC meeting in November 2016. The 30-day moving average external reserves increased by 11.51 percent from US$24.50 billion as at November 22, 2016 to US$27.32 billion as at January 17, 2017. The increase in oil production from September 2016 up till November 2016 boosted the external reserves. The support from the African Development Bank (AfDB) contributed to the external reserves. A rate cut may lead to capital flight. Thus, we expect the MPC to hold rates while it awaits complementary fiscal policy support”, they stressed.

The naira depreciated at the inter-bank and parallel markets between the last MPC meeting and January 17, 2017. It recorded a marginal depreciation of 0.08 percent at the inter-bank market to close at US$1/N305.25 on January 17, 2017 from US$1/N305 on November 22, 2016.

The premium between the inter-bank and parallel markets averaged about N181 after the last MPC meeting in November 2016. The parallel market rate also depreciated by 6.12 percent to $1/N498.50 on January 17, 2017 from $1/N468 on November 22, 2016. A rate cut may lead to further depreciation in the value of the naira.

Consequently, the average yields on the 182-day and 364-day Nigerian government treasury bills (NTBs) increased to 19.17 percent and 22.98 percent in December 2016, compared with 19.11 percent and 22.85 percent, respectively, in November 2016.