Nigeria: Experts Predict Interest Rate Retention Ahead of MPC Meeting

(file photo).

As members of the Monetary Policy Committee (MPC) meet today and tomorrow at the headquarters of the Central Bank of Nigeria (CBN) in Abuja, economic experts say it is most likely that the Committee will retain Monetary Policy Rate (MPR) at 14 per cent.

At its May 2018 meeting, the MPC maintained the MPR at 14 per cent 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 per cent respectively.

In exclusive interviews with our reporter yesterday, managing director/chief executive officer of Financial Derivatives, Bismarck Rewane and Professor Uche Uwaleke of the department of banking and finance, Nasarawa State University expressed believe that MPC will retain the rates at their current positions. They hinged their confidence on the twin factors of the ongoing pre-election campaigns and potential increase in headline inflation.

"We are not expecting anything different," Mr Rewane said, stating that "the closer you get to election, the more unlikely you will make any change in interest rate because whatever change you make will be interpreted to being politically motivated." He believes that Nigeria should have reviewed the interest rate downward in the last two meetings of the Committee. "Doing it now will be too little, too late. But like they say, it's better late than never. But any move by this time may be considered politically motivated," the economic analyst asserted.

Even though the rate of inflation is declining, the experts say it's beginning to look like the decrease will soon rebound. The International Monetary Fund (IMF) on the 13th of this month said inflation in Nigeria would pick up in the second half of 2018 as base effects dissipate and higher spending and supply constraints in agriculture put pressure on prices. Increased oil exports would keep the current account in surplus, helping stabilise gross international reserves even if the current pace of foreign portfolio outflows continues, in a statement issued at the end of its delegation's visit to Nigeria about two weeks ago. The National Bureau of Statistics (NBS) will today give update on the level of the nation's headline inflation.

Rewane says the challenges of political campaigns and the election coming will mean that a reduction in interest rate is not going to have the desired impact. "More likely than not... but again, who know? So, I won't be surprised if it is retained," he said.

Professor Uwaleke shares similar view. "In as much as monetary policy easing is desired to stimulate economic activities especially against the backdrop of oil price recovery, stable exchange rate and retreating inflation, the MPC members will have to factor in other weighty considerations such as the effect of the pre-election spending and fiscal surprises from the delayed budget implementation," he predicts.

Taking notice of events at the global scene, Uwaleke recalled the issue of interest rate hike in the United States which has led to exit of foreign investors from Nigeria in search of higher returns. Also, he said economic uncertainties resulting from the US-China trade war and the Brexit negotiations will play a part in the MPC's decision.

"I think the MPC will leave the policy parameters unchanged considering that the balance of risks are in its favour. Doing otherwise could risk reversing the gains already achieved in the forex market," he said, adding that he doesn't also see the MPC further tightening monetary policy by increasing the MPR as recommended by the IMF.

In the global scene, as the group of 20 finance ministers gather this week at the bank of the Rio de la Plata in Buenos Aires, there are expectations that they will concentrate on three thematic areas: Global trade, emerging market vulnerabilities, and the impact of technology on jobs.

Managing director of IMF, Christine Lagarde says global growth for 2019 may not be as high as the 3.9 per cent world economic growth witnessed in the first half of 2018. She noted that already, growth is beginning to slow in the Euro Area, Japan, and the United Kingdom. US growth, which has been boosted by the recent fiscal stimulus, is projected to moderate in the medium term. In the emerging markets, growth is now more uneven than it was in April, due in part to rising oil prices and currency pressures. "So, the G-20 finance ministers have a full agenda heading into their meeting in Argentina," she said.

Analysts believe that the rates may remain unchanged for the rest of the year as the committee strives not to upset the stability in the system ahead of capital outflows on the back of United Stated Federal Reserve's rates hike and upcoming general election in the country next year.

The MPC 262nd meeting is holding 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 second quarter of 2018, flimsy domestic economic recovery, steady moderation in inflation, polity fragilities and disquiets around fiscal spending ahead of the 2019 general elections.

Analysts at Afrinvest West Africa said: "We believe the committee will maintain status quo on all policy rates in order to avoid upsetting the current economic momentum. Our 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.

According to the analysts, the MPC must keep a delicate balance between growth and price stability although inflation has maintained a steady decline and the foreign exchange has remained relatively stable.

Inflation is currently down to 11.61 per cent a more than 24 months low and is expected to further slide down when the Nigeria Bureau of Statistics release the figures this week. According to analysts at FSDH Merchant Bank, while 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 the MPC to ease policy.

Noting that the weak economic and credit growth in Nigeria do not support a rate hike, FSDH analysts said possible capital flight and adverse developments in the crude oil market are also possible risks to stable prices.

With the real GDP expanding slightly slower by 1.9 per cent year on year in the first quarter of 2018 from 2.1 per cent in the last quarter of 2017, falling below expectation, analysts say the weak economic recovery and rising crises in some parts of the country are responsible for the weak credit growth, adding that an expansionary policy may be appropriate to expand credit if the social crises are resolved.

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