24 September 2018

Nigeria: Why MPC Will Sustain Hold On Rates This Week

While every one would want interest rate cut at the end of meetings by the policy making arm of the Central Bank of Nigeria (CBN), it would be hope deferred again for the 13th time, because of expected domestic and foreign backlash.

Meanwhile a poll of analysts' opinions and projections on the decisions of the policy makers, due to begin today, showed that they prefer a rate hold to increase, saying they should be circumspect, especially with the resurged inflation numbers and expected increase in the United States interest rate decision due Wednesday.

Analysts at Afrinvest Securities Limited said they expect inflationary pressures to persist, with the headline numbers trending higher in the coming months.

"Budgetary releases for capital expenditure and in particular, election spending, which begun this month, will be the major drivers of the price growth.

We do not rule out the positive impact of the main food harvest in restraining prices, but we are conservative on our outlook for harvest supplies, as early indications are underwhelming," they said.

The Ayodeji Ebo-led investment and securities company, said current indications are pointing to 11.4 per cent as the new inflation rate this September, hence policy makers will need more convincing growth catalysts to ignore the trend.

Besides, the inflation data, which is expected to feed into the fixed income market, through higher yields, as seen in the last two treasury bills' auctions, may also serve to lure or retain foreign investors and reduce capital flight in the case of U.S. rate hike and rate hold decision by CBN.

A research analyst at Cyprus-based FXTM, Lukman Otunuga, said the window of opportunity for the Central Bank of Nigeria to cut interest rates just narrowed further, following the rise in inflation to 11.23 per cent.

"It must be kept in mind that for an extended period, the apex bank was waiting for inflation to reach single digits before cutting interest rates to support growth.

Now, the consumer prices are at risk of aggravating, as pre-election spending capable of triggering demand-pull inflation, could force CBN to remain on standby, not just now, but throughout the year.

"Granted, an interest rate cut now has the ability to stimulate economic growth, but it has high propensity to trigger capital outflows in any case of monetary policy divergence between the Federal Reserve and CBN," he said.

For the Head of Research at FSDH Merchant Bank Limited, Ayodele Akinwunmi, said his bank's research showed that the most appropriate monetary policy decision under the current economic and financial market situation is to hold policy rates at the current level.

Although there are some arguments to increase rates, he noted that the need to provide necessary incentives for the Nigerian economy to achieve inclusive growth negates the option.

But explaining why a rate cut would not be possible for the economy now, he said that the U.S.-China trade war has heightened global risks, which may lead to an increase in interest rate and the U.S. has all the opportunities to do so now.

"A rate hike by U.S. may further increase global yields, with its attendant impact on capital flights from emerging markets, including Nigeria, as well as demand pressure at the foreign exchange market.

Thus, a rate cut in Nigeria is not appropriate under the situation," he said.

Noting that the sluggish growth rate of 1.5 per c not recorded in the second quarter of 2018, calls for urgent policy measures and engagements to boost economic activities, he canvassed a combination of monetary, fiscal and trade policies to stimulate sustainable growth, rather than focus only on interest rate at the moment.

"Although the fragile growth was driven by the non-oil sector, the fact that dominant sectors of the economy either recorded low growth or contracted in The second quarter indicates that urgent actions are required.

"The demand for foreign exchange increased in the face of a relative drop in the foreign exchange inflow through the Investors' and Exporters' Window, causing the drawdowns from the external reserves until now," he said.

An analysis of figures showed that total inflows for the month, as at September 19, 2018, stood at $890 million and given the run rate, the month may record the least inflows since May 2017.

The 30-Day moving average of the external reserves decreased by 4.35 per cent to approximately $45 billion as at September 20, 2018, from $47.1 billion at the end of July 2018, an indication of renewed pressure at the foreign exchange market, but being managed by the apex bank.

"An attractive Nigerian Treasury Bill (NTB) yield around 15 per cent may help to attract foreign portfolio investment and reduce capital flight.

Nevertheless, deliberate fiscal measures and engagement that will promote non-oil exports are lasting solutions to attract foreign exchange that will guarantee stability," he added.

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