MPC to retain rate due to foreign investors, inflation expectations —Experts

Finance and economic experts are anticipating that the Monetary Policy Committee (MPC), scheduled to meet on Monday and Tuesday, May 22 and 23 respectively, will retain the Monetary Policy Rate (MPR) at 14 per cent.

Experts at Cowry Assets Management Limited said their expectation on   the Monetary Policy Rate (MPR) is based on the stance of the monetary authority to encourage foreign portfolio inflows by ensuring positive real returns for investors against the backdrop of relatively high inflation rate.

In the same vein, they also expect the liquidity ratio to be maintained at 30 per cent while the Standing Lending Facility (SLFR) Rate and Standing Deposit Facility Rate (SDFR) retained at +2 per cent and -5 per cent respectively. The assets managers however, expect the Cash Reserve Ratio requirement to be reviewed downwards by 250 basis points (bps) from 22.5 per cent to 20 per cent on account of persistent liquidity strain in the financial system, occasioned in part by crowding out effect of increased public sector borrowing to fund the fiscal deficit and which may have resulted in difficulty for lenders to fund foreign exchange demand of end users.

While, experts at  Afrinvest West Africa Limited believes that given a number of noticeable signals of a potential rebound in economic activities from (Q2)2017, the May MPC meeting is to “mark attendance “as “we are of the view that the Committee would be likely satisfied with the recent traction the economy garnered.

At the Bismarck Rewane-led Financial Derivative Company Limited, experts believe that given that the ratio of hawks to doves is tilting towards the hawks, a status quo on monetary parameters will be sustained.

This is according to them, because inflationary pressures persist in spite of the sustained decline in year- on-year inflation. The planting season is still in play; the effect of policy induced shortages on some key commodities continues to linger (beans and rice).

“The Ramadan fast will commence soon and we expect food prices to also increase. Finally, the 2017 budget has been passed and awaiting presidential assent. We expect budgetary disbursement to have demand-pull effect on consumer prices,” the FDC analysts submitted.

To experts at Afrinvest West Africa Limited, this third meeting of the MPC of the Central Bank of Nigeria in 2017 is coming at a time when the global economy is viewed to be in a sweet spot following respite in global downside risks related to the US elections, Brexit uncertainty and concerns of slower growth in China.

Afrinvest Research is of the view that the argument for maintaining status quo and consolidating on recent positives in the economy will be overriding at this May Meeting.

“On a balance of considerations therefore, we vote for retention of MPR at 14.0 per cent with the Asymmetric Window at +200 and -500; a hold on CRR at 22.5 per cent; and retention of Liquidity Ratio at 30.0 per cent; and e reason that the convergence of multiple FX windows into one truly flexible market determined FX structure will further boost investor confidence and buoy foreign portfolio inflow into the country.

“Whilst the MPC will likely be comfortable with rate convergence between the street and Nigeria Autonomous Foreign Exchange (NAFEX), the Committee would reason the need to charge the CBN to revert to the recommendation on flexible foreign exchange framework which was approved since the May 2016 Meeting,” the company stated.

Whilst the recent downtrend in Headline inflation, especially the satisfactory moderation in core inflation from 18.1 per cent in Dec-2016 to 14.8 per cent in April-2017, could justify a rate cut, the analysts are of the view that the MPC will resist this temptation as this may be premature.

Also, reducing MPR at this time will not necessarily reduce the risk perception of the country more so that a higher rate environment would further dampen bank’s appetite towards real sector lending. Similarly, reducing Cash Reserves Ratio (CRR) defies monetary policy logic given the frequency of weekly Open Market Operation (OMO) mop-ups at a significantly high cost.

The latest data show that as at March 2017, Commercial Banks’ Reserves with the CBN settled at N3.3 trillion with CRR at 22.5 per cent. If CRR is reduced by 2.5 per cent to 20.0 per cent for example, a total injection of N366.0 billion would be pumped into the system immediately. It will be therefore counter intuitive to reduce CRR that is at no cost to the CBN only to mop-up with OMO at expensive rate. “

On the flip side, our analysis completely rules out the possibility of a hike in CRR,” stated Afrinvest in a note to investors.