MPC to consolidate recent improvements, keep rates unchanged —Analysts

In order to consolidate on the gains of recent improvements that have been recorded in inflation, parallel market foreign exchange (FX) rate, increase in oil production and the release of Economic Enhancement and Recovery Growth Plan (ERGP) by the fiscal authority, the Monetary Policy Committee (MPC) will leave rates unchanged, different analysts have predicted.

The MPC will be having its second meeting for the year today Monday and tomorrow Tuesday (March20-21, 2017) to review major global and domestic economic developments since its last meeting.

Robert Omotunde, Head of Research at Afrinvest West Africa Limited and his team of Finance and investment experts in a note to investors stated: “As the Committee sits to deliberate, we are of the view that the MPC will maintain status quo on all rates whilst reiterating the need for the CBN to focus on improving FX liquidity in the Foreign Exchange market especially as hinted by the new ERGP document.”

Similarly, Managing Director, Cowry Assets Management Limited Mr Johnson Chukwu and his team of experts stated: “we expect Central Bank of Nigeria’s Monetary Policy Committee to leave the benchmark interest rate – the Monetary Policy Rate (MPR), unchanged at 14 per cent despite moderation in inflationary pressure.

“This is partly premised on the need to attract foreign portfolio inflows in order to help boost Nigeria’s external reserves, particularly in the light of recent increase in benchmark interest rate by the United States Fed amid signs of stronger economic conditions, particularly in developed economies, which tend to lure portfolio investors away from emerging markets.”

The analysts further added that given CBN efforts to meet dollar demand by increasing supply, the Monetary Authorities would not want to inject significant liquidity into the market to avoid triggering excessive demand for foreign exchange.

The Fiscal authorities pursues an expansionary policy (2017 proposed budget expenditure is estimated at N7.3 trillion compared to 2016 estimates of N6.1 trillion) in order to reinstate the economy on sustainable growth path.

But analysts believe that in the absence of a truly flexible FX market, an expansionary stance by way of rate cut or reduction of Cash Reserve Ratio (CRR) may not only fuel further monetary induced inflationary pressures while toeing the line of the fiscal managers may also discredit foreign capital attraction into the country especially given the recent US Fed Fund rate hike.

Similarly, Afrinvest believes that a rate cut could dampen CBN’s efforts in squeezing excess liquidity from the system which could hamper the stability of the Foreign Exchange market. Yet, on the flipside, a hike in rate may also be sub-optimal at this time as this may further squeeze out liquidity from the banking system as banks may deploy funds towards investment securities while also constraining growth potentials, thus worsening the economic conditions the analysts warns.

Therefore, on a balance of considerations, “we project that the MPC will: Retain the MPR at 14 per cent; Retain the CRR at 22.5 per cent; Retain the Liquidity Ratio at 30.0per cent; and Retain the Asymmetric Window at +200 and -500.”

The analysts suggest that the implication on the markets, should the MPC maintain status quo, is expected to be neutral given that most foreign investors are staying on the side-line at the moment against the backdrop of an inefficient foreign exchange market. Currently, the equities market remains quiet and driven only by short term speculative trading and fundamentally attractive earnings release.