MPC meeting: Analysts’ consensus favours another retention of policy rates

A herd of finance and investment experts have reached a consensus that the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) which begins its meeting today, will maintain status quo on policy rates as they sit to deliberate on recent happenings in the global and domestic landscape.

The MPC is set to have its fifth meeting of the year on the September 18 and 19, 2017.

Analysts at Vetiva Capital Management believe that in the light of recent yield declines in fixed income market, the bearish inflation outlook “may prove a snag to MPC easing intention at upcoming meeting.”

Also, Afrinvest Research and Investment Company is of the view that though the improvement in external sector variables and little growth of non-oil sector may impose a temptation for policy easing, yet, “MPC would maintain status quo this week given the need to consolidate gains on stabilising FX and inflation rates.”

In a note to investors, Afrinvest further noted that as has been the case with all meetings held so far in 2017, emphasis will be placed on the need to consolidate gains in the foreign exchange (FX) market while urging for more fiscal-monetary policy coordination to sustain recent improvements in domestic macroeconomic fundamentals.

According to the experts, since the last MPC meeting in July, the odds of a near term aggressive monetary policy tightening in advanced economies have slimmed considerably as officials of the US Fed, European Central Bank (ECB) and the Bank of England (BoE) softened hawkish rhetoric in response to economic disruption caused by natural disasters, heightening geological risk and increased uncertainty on Brexit negotiations. Dovish comments from Central Bankers have spurred bullish bets on financial assets globally, with US equity market benchmarks reaching new record highs on Wednesday while Emerging Market high yield credit spread hit their lowest level since 2007 as bond yields fell and prices rose.

“Whilst we are of the view that slower growth of the non-oil sector, despite improving FX liquidity and recent drive to boost Agriculture sector productivity, will strengthen the case for policy easing from dovish members of the MPC, we reason that the hawkish argument may be overriding given the need to sustain recent gains including increased FPI and FDI inflow,” said Afrinvest.

The analysts tightening stance is further supported by the NBS’ recently released Foreign Trade Statistics data for Q2:2017 which indicates a positive trade balance for the second consecutive quarter, albeit trade surplus slimmed Q-o-Q on account of faster growth in imports relative to exports.

The report showed aggregate trade for the period summed up to N5.6 trillion, indicating a 37.3 per cent increase Y-o-Y and a 7.7 per cent increase Q-o-Q. Trade Balance for Q2:2017 came in at a surplus of N506.5 trillion (N3.1 trillion in exports vs. N2.6 trillion in imports) from a deficit of N572.1 trillion in Q2:2016, but lower than N719.4 trillion surplus recorded in Q1:2017.

The firm’s expectations are based on the following considerations. Price level remains sticky as high base effect thins out: the NBS inflation report for August indicated Headline Inflation marginally decelerated 3bps to 16.01per cent year on year ( Y-o-Y) from 16.04 per cent in July. Month on Month (M-o-M) CPI growth has remained elevated since the start of the year against the backdrop of a food price pressure which took Food Inflation to an all-time high of 20.3 per cent in July 2017.

With the economy now running out of high base effect driven moderation in headline inflation, analysts model projects that inflation rate will rise for the first time since the start of the year in September. “Given supposed price-anchored monetary policy regime, the MPC is not likely to cut benchmark rate in a period of rising inflation expectation,” Afrinvest said.

According to the analysts, MPR has become a less effective Monetary Policy Tool: the case for easing via benchmark rate reduction becomes weaker if the current disparity between the benchmark rate and short-term fixed income yields is taken into consideration. More so, the Apex Bank has gradually resorted to the use of short-term instruments (OMO and T-bills) to guide the economy on a path of easing.

The Security and investment firm said while its medium term outlook favours a gradual monetary easing, it believes the stabilization of the FX market is paramount to achieving monetary policy objectives. The FX market despite improvements recorded so far in the year, still is in a fragile state as the CBN is yet to harmonize all rates at the official market.

As such, in the event that a unified rate is not achieved, monetary easing poses a threat for FX stability. Furthermore, the current realities of Nigeria’s budget deficit, suggests the need for the fiscal authorities to continuously fund this disparity which current tightening stance enhances; though at a higher cost to government.

“In light of the above, the more rational decision we foresee the MPC making is to maintain status quo and continue to consolidate on gains in the FX market. Hence, we believe the outcome of the 5th MPC meeting would be to: retain the MPR at 14.0per cent; retain the CRR at 22.5per cent; retain the Liquidity Ratio at 30.0per cent and retain the Asymmetric corridor at +200 and -500 basis points around the MPR,” the analysts stated.