IN spite of the two months consecutive decline in inflation rate, improved stability of the exchange rate and decline interest rate on fixed income instruments, the Monetary Policy Committee, MPC, of the Central Bank of Nigeria, CBN, is expected to retain the Monetary Policy Rate, MPR, and other benchmark rates at same level at the end of its 266th meeting holding today and tomorrow.
At its last meeting in January, the MPC retained the MPR at 14 percent for the 15th time since July 2016. The committee also retained the asymmetric corridor of +200/-500 basis points around the MPR; the Cash Reserve Ratio, CRR, at 22.5 per cent; and the Liquidity Ratio at 30 per cent.
The decision of the MPC is usually hinged on the need to checkmate the inflation rate and enhance exchange rate stability, which have recorded modest improvements in the last two months.
Exchange rate stability
From 12.10 percent in December 2018, inflation declined to 11.8 percent in January and further to 11.56 percent in February, while the naira appreciated in the I&E window to N360.43 per dollar last week from N364 per dollar at the end of December. Also yields on 364-Day treasury bills fell by 214 basis points to 12.86 percent last week from 15 percent in January.
Financial market analysts, however, projected that the MPC members will not be swayed by these improvements to make a decision to lower the MPR.
CBN and the economy, going forward
Analysts at Lagos based investment firm, Afrinvest Plc said:"Since the last meeting, global and domestic economic conditions have remained favourable. On the global scene, monetary policy is now accommodative, supporting the return of investors into Emerging and Frontier markets.
"On the domestic scene, growth has improved, inflation is moderating, and external reserves have strengthened due to a surge in capital inflows post-elections. Despite these tailwinds, we believe the CBN would maintain all policy rates to manage the delicate balance between growth, inflation and exchange rate stability.
"Although the case for monetary easing has become compelling, the CBN is more comfortable using OMO instruments to guide yields rather than the MPR. This has already resulted in a moderation in average T-bills and bond yields to 13.2 percent and 14.2 percent respectively.
"However, this strategy is unlikely to be supportive of growth given that interest rates in the real economy would remain high. Although members expressed concerns about the fragile state of the economy in the last two MPC meetings, we believe the power to adjust yields to attract and sustain capital flows as and when needed supersedes this.
"We do not see the possibility of a rate hike due to weak economic growth, which remains below population and long-term growth rates of 3.0 percent and 7.6 percent respectively."
According to analysts at FSDH Merchant Bank, the short term outlook for the economy does not justify downward review of the MPR.
They said: "Recent data on inflation rate, exchange rate and interest rate on fixed income securities in Nigeria have shown temporary improvement. This may mean things are looking up in Nigeria. Therefore, the temporary stability in key indicators from January 2019 till March 21, 2019 may support an argument for monetary policy easing (reduction in interest rate and other measures that can push more money into the financial system). Adding to the debate supporting easing of monetary policy is the fact that the general election is now behind us, so the negative impact of electioneering spending on price stability and associated uncertainties surrounding the election may be over. However, FSDH Research believes the short-term outlook of the Nigerian economy justifies a hold decision on policy rates at the current levels.
FSDH Research believes the decision of monetary policy would be based on what will happen to price stability if there is an adjustment to the pump price of Petroleum Motor Spirit (PMS) and the electricity tariff sometime this year. Did you say,"oh no, the adjustments will not happen". Sorry to disappoint you! These adjustments will surely happen; it is a question of when. You may recall that FSDH Research had discussed that after election, the economic managers and the politicians would face the realities to fix the pressure points in the economy to lay the foundation for sustainable growth."
Meanwhile, the Debt Management Office, DMO, will this week float N100 billion FGN Bond auction, with analysts expecting strong demand and lower stop rates. According to analysts at Cowry Assets Management Limited, "In the new week, DMO will issue bonds worth N100 billion, viz: 12.75 per cent FGN APR 2023 (five-Year Re-opening) worth N40 billion; 3.53 per cent FGN MAR 2025 (seven-Year Re-opening) worth N40 billion; and 13.98 per cent FGN FEB 2028 (10-Year Re-opening) worth N20 billion respectively. We expect the bonds to be issued at lower stop rates amid demand pressure."
CBN injects N496m as external reserves hit one month high at $43.5bn
The CBN last week increased its weekly intervention in the interbank foreign exchange market to $496 million even as the nation's external reserves rose to one month high of $43.5 billion.
Data from the CBN showed that the reserves last week recorded a weekly increase of $579 million to $43.507 billion on Wednesday last week from $42.928 billion, Wednesday of the previous week. The $43.507 billion recorded last week represents the highest in one month since February 22, 2019.
Last week the CBN intervened twice in the interbank foreign exchange market. It intervened on Tuesday by injecting $210 million, allocating $100 million to the wholesale segment, $50 million to the SME window and $50 for invisibles.
This was complemented with injection of $286.6 million on Friday as well as CNY39.09 million via the Retail Secondary Market Intervention Sales (SMIS).
The naira however depreciated by 25 kobo in the I&E window as the indicative exchange rate rose slightly to N360.43 per dollar last week from N360.18 per dollar the previous week.