MPC: Policy rates to stay unchanged on capital flow reversals —Analysts

After looking at possible policy options open to the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), finance and investment analysts have concluded that members may vote to retain rates at the current levels mainly because of risk of foreign capital exit.

The third meeting of the MPC of the CBN in 2018 will hold on Monday (today), 23 and Tuesday, 24 July 2018.

Analysts from First Securities Discount House (FSDH) are of the view that the MPC may hold rates steady, even though there are justifications to ease the policy.

“The view of the MPC members that fiscal injections and rising rates in the international market would have adverse impacts on price stability in Nigeria may not allow the MPC to ease policy. Weak economic and credit growth in Nigeria do not justify rates hike,” they stated.

FSDH team believes that if the MPC members’ fear about the impact of fiscal injections and rising rate in the international market on domestic price stability does not materialize; policy easing may be required very soon. Notwithstanding the hold decision they said in a note to clients.

At its meeting in May 2018, the MPC maintained the Monetary Policy Rate (MPR) at 14 per cent, with the asymmetric corridor at +200 and -500 basis points around the MPR; it retained the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) at 22.50per cent and 30per cent respectively.

Another group of analysts from Afrinvest (West) Africa Limited expects rates to remain unchanged for the rest of second half (H2) of 2018.

They noted that continued disinflation and positive external conditions create a compelling case for a rate cut in order to stimulate currently weak growth momentum; but,  the CBN has already eased liquidity conditions considering lower yields in the fixed income market.

“We believe that the argument for cutting the Monetary Policy Rate (MPR) now will only be for policy consistency. Although rates will converge, the impact will be negligible. In addition, risk factors to exchange rate stability, which we believe is the current policy anchor, in light of ongoing capital outflows may tilt the scale towards a hawkish stance,” stated Afrinvest.

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Nevertheless, the analysts believe that monetary tightening is a potential downside risk to growth though it may attract and sustain capital flows. “Thus, a neutral position gives the CBN opportunity to assume a position which would not be inimical to the twin goals of growth and price stability. Furthermore, the CBN retains its flexibility which could prompt quicker responses to emerging conditions in global financial markets as they affect external sector stability.

“Given these considerations, we believe the MPC will retain status quo on all policy rates. Indeed, we expect rates to remain unchanged for the rest of H2:2018 as the window for a rate cut is increasingly narrowing on polity fragilities,” Afrinvest said in a note to investors.

The uncertainty usually associated with change of government in Nigeria will become full-blown in H2:2018 ahead of the 2019 General elections as foreign investors are likely to flee for “safer haven” economies the firm said.

Although there are arguments in favour of tightening, considering the threat of shrinking interest rate differential between Nigeria and advanced markets, which makes naira assets less attractive, “we believe the Committee will shy away from this as the CBN could deploy other monetary policy tools (OMO) to achieve this without tweaking MPR,” it stated.

According to Afrinvest, the MPC must keep a delicate balance between growth and price stability, we believe the Committee will maintain status quo on all policy rates in order to avoid upsetting the current economic momentum. Our position is on a balance of factors underscored by careful analysis of sustained positive conditions in global commodity markets alongside emerging market risks and continued disinflation amid steady but weak growth momentum.”

On the flip side, the analysts observed that the equities market will remain pressured by capital flow reversals on key risk concerns, notwithstanding stable macroeconomics and improving fundamentals of companies.