Nigeria: As MPC Meets, 2019 Elections, U.S. Rate Hike May Shape Outcome - Experts

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Lagos — Ahead of the third Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN) this year, slated for today and tomorrow, analysts have once again enumerated the policy options open to the committee.

Analysts at the FSDH are of the view that the MPC may hold rates and that though there are justifications to ease the policy, the view of the MPC members that fiscal injections and rising rates in the international market would have adverse impacts on price stability in Nigeria, may not allow them, to ease policy.

"Weak economic and credit growth in Nigeria do not support a rate hike," they noted.

At its May 2018 meeting, the MPC maintained the Monetary Policy Rate (MPR) at 14%, with the asymmetric corridor at +200 and -500 basis points around the MPR; retained the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) at 22.50% and 30% respectively.

FSDH researchers expect that the US Federal Reserve may increase rate when it meets in September and December 2018. The expected Fed's action may push funds further into the US Treasury market, and also push global yields upwards, leading to additional pressure in emerging markets therefore, tight monetary policy will be appropriate in this context.

FSDH Research believes measures to stimulate growth are required. The expected growth in government's spending in the second half of the year should increase economic activities, with positive impacts on the income of households and firms.

The inflation rate has maintained a consistent downward trend since January 2018. FSDH Research's forecast shows that it may drop to single digit in August 2018, provided there is no food crisis that could lead to escalating food prices

FSDH Research also notes that possible capital flight and adverse developments in the crude oil market are also possible risks to stable prices.

The weak economic recovery and rising crises in some parts of the country are responsible for the weak credit growth. An expansionary policy may be appropriate to expand credit if the social crises are resolved.

Similarly, analysts at Afrinvest have highlighted that: "Amid concerns on policy normalisation in global systemic central banks, rising yields on emerging market assets - resulting from downside risk factors consequent on sustained foreign capital flow reversals since Q2:2018, flimsy domestic economic recovery, steady moderation in inflation, polity fragilities and disquiets around fiscal spending ahead of the 2019 general elections, the MPC must keep a delicate balance between growth and price stability.

"We believe the committee will maintain status quo on all policy rates in order to avoid upsetting the current economic momentum," the said.

Afrinvest position is on a balance of factors underscored by careful analysis of sustained positive conditions in global commodity markets alongside emerging market risks and continued disinflation amid steady but weak growth momentum.

They noted that continued disinflation and positive external conditions create a compelling case for a rate cut in order to stimulate currently weak growth momentum; "but, as we have hinted in our earlier reports, the CBN has already eased liquidity conditions considering lower yields in the fixed income market. We believe that the argument for cutting the MPR now will only be for policy consistency. Although rates will converge, the impact will be negligible.

"In addition, risk factors to exchange rate stability, which we believe is the current policy anchor, in light of ongoing capital outflows, may tilt the scale towards a hawkish stance. Nevertheless, monetary tightening is a potential downside risk to growth though it may attract and sustain capital flows. Thus, a neutral position gives the CBN opportunity to assume a position which would not be inimical to the twin goals of growth and price stability.

"Furthermore, the CBN retains its flexibility which could prompt quicker responses to emerging conditions in global financial markets as they affect external sector stability."

They also noted that the uncertainty usually associated with change of government in Nigeria will become full blown in H2:2018 ahead of the 2019 general elections as foreign investors are likely to flee to 'safer haven' economies.

Renowned economist and past member of the MPC, Dr Adedoyin Salami, speaking on the economic uncertainty in the economy ahead of 2019 elections, said stakeholders are concerned about oil production which has dropped to around 1.8 million barrels per day suggesting some rumbling in the creeks again which is beginning to undermine oil output.

The election uncertainty is not a Nigeria specific challenge. It is part of the democratic circle and the international response of capital should be expected.

Speaking on the likely spike in inflation figures before the end of the year, the economist said: "Focusing on the Federal Government alone is an understatement of the country's spending. The combined states and federal budgets has risen from N14 trillion to N18 trillion and that money would be spent.

"If half of the state governors are not eligible for re-election, they would likely not want to leave any money for their successors. A lot of money being spent means a potential higher levels of inflation and exchange rate demand."

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