How FX stability, fall in inflation may influence MPC decisions

…MPC will vote to maintain policy rates at the current levels – FSDH

…We expect majority members to elect to leave policy parameters – Cordros Capital

Motolani Oseni

As the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) begins its second round of meeting in 2019 from today and Tuesday in Abuja, financial analysts have predicted that rates might be kept unchanged, due to continuous fall in the inflation rate, stability in the foreign exchange market and successful completion of 2019 presidential election.

It is, however, worthy of note that the benchmark interest rate has been held at 14 per cent since July 2016, when the headline inflation was above 18 per cent. But the apex bank has maintained tight monetary policy, even as inflation the rate currently stands at 11.31 per cent.

Analysts at FSDH noted that based on the short-term outlook of the nation’s economy, its research team believes that “members of the MPC will vote to maintain policy rates at the current levels.”

FSDH Research in its report said: “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 sometimes this year”.

At its meeting in January 2019, the MPC maintained the Monetary Policy Rate (MPR) at 14per cent, with the asymmetric corridor at +200 and -500 basis points around the MPR. It also retained the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) at 22.50per cent and 30per cent respectively.

FSDH The research noted that “the increase in the price of crude oil, the current the position of the external reserves and the increase in Foreign Portfolio Investments (FPIs) have provided short-term stability for the value of the Naira.

“The yield on the 364-day Nigerian Treasury Bill (NTB), which was 17.65per cent in January 2019, dropped by 3.57per cent to 14.08per cent as at 20 March 2019.

“Again, don’t get excited! It is very unlikely that foreign investors will be willing to buy NTBs below the current yields. Capital flight or a possible slowdown in inflows from FPIs may exert pressure at the foreign exchange market.

Therefore, a rate cut that will reduce the yield on NTBs may not support the objective of a stable exchange rate.

“The inflation rate dropped to 11.31per cent in February 2019, in line with the forecast of FSDH Research, from 11.37per cent recorded in January 2019. Although the inflation rate is trending downward, the key limiting factors to the continued drop in the inflation rate are the need for adjustments to the current pricing regime of PMS and the electricity tariff. Any adjustment of these prices will result in a hike in the inflation rate.

“FSDH Research believes that with the inflation rate in double digits, as we project it to be by end-2019, may not justify a reduction in rates.

“Data from the CBN shows that the growth in credit to the private sector was below target. There is an argument that an increase in credit creation to the private sector could encourage business expansion and stimulate economic growth.

However, this may not necessarily be the case under the current situation in Nigeria as other fiscal measures are required to improve the operating business environment.”

Also, analysts at Cordros Capital stated that “we expect the majority of its members to elect to leave policy parameters unchanged. Our view is anchored on the apex bank’s intolerance for FX volatility, which has remained at the core of its policy thrust.”

According to them, the troika of, the recent surge in foreign portfolio inflows, naira stability and descent in headline inflation should have ordinarily ignited an accommodative policy stance.

“Nevertheless, we expect the MPC to remain cautiously optimistic in a bid to consolidate on currency gains thus far.

Farther out, given the still shaky crude oil price outlook, elevated maturity profile in the latter part of the year and its implication on the naira, and perceived upside risk to inflation, we see lower chances of a rate cut over the rest of the year,” analysts at Cordros Capital added.