Based on the analysis of most key considerations, analysts from Lagos based investment Banking and Research Company, Afrinvest (West) Africa Limited have projected retention of all policy parameters at current levels by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN).
The MPC will meet on Monday (today) and Tuesday to decide on monetary policy parameters for the rest of the third quarter (Q3):2021.
At the last meeting, the Monetary Policy Rate (MPR) was retained at 11.5 per cent, with Asymmetric Corridor around MPR: +100/-700bps; Cash Reserve Ratio was retained at 27.5 per cent, and Loan to Deposit Ratio at 30.0 per cent, respectively.
“Although we do not anticipate Committee members to vote unanimously as the case during the May MPC’s meeting, we expect the voting pattern to tilt in favour of retaining policy parameters as the nation awaits the Q2:2021 GDP performance numbers,” the finance and economic experts emphasized.
The experts said members will focus on key global trends since the last MPC meeting in May 2021. According to them, there was sustained economic recovery in both the U.S. and China – the two biggest economies in the world and two of Nigeria’s major trading partners.
For instance, the US economy added 850,000 jobs to non-farm employment across different sectors in June 2021, translating to an increase of 52.1per cent over the 559,000 added in the preceding month.
Also, preliminary data from the Chinese National Bureau of Statistics revealed that GDP growth for Q2:2021 came in at a record 12.7 per cent, compared to 7.9 per cent reported in Q1:2021. This was aided by the strong recovery in Manufacturing and Trade sectors (up 17 per cent y/y apiece).
“We believe these developments formed a major driver of the improved global demand for crude oil and price stabilization above $65/bbl since the last MPC meeting. These are positive external development for the MPC to consider, as they boost Nigeria’s hope of improved exports earnings, foreign capital flows, and remittance in Q2:2021 and the subsequent quarters,” they submitted.
However, on the low side, there has been a global-wide spread of the Delta variant of the COVID-19 pandemic from India and Brazil to other parts of the world (including Nigeria) since the last MPC meeting. In addition, the inflation rate in the US hit 5.4 per cent in June 2021, the highest reported since August 2008.
Afrinvest in a note to clients considers these as worrisome development for the MPC, as a strong resurgence of the pandemic in Nigeria may erode recent recoveries, while the surge in inflation rate in Africa and Emerging markets (AEs) may accelerate hawkish monetary policies, capable of triggering FX reversal from Nigeria and other emerging markets.
On the home front, the headline inflation rate has moderated twice since the last MPC in May to 17.8 per cent (June 2021) from 18.1 per cent in April, meaning that it provides a boost to the price stabilization objective of the CBN.
They agreed that Broad money supply (M3) and credit to the private sector have both increased by 1.8 per cent and 0.7 per cent, respectively, from levels last seen at the May MPC meeting to N39.8 trillion and N32.1 trillion.
“We believe this trend supports the MPC’s drive for credit expansion to the real sectors to boost aggregate production and consumption. Also, the domestic equities market All-Share Index has gained 1.1 per cent since the last MPC meeting to print at 38,667.90 index points vs 38,233.68 index points as of May 26, 2021.
“This is also a boost to the capital market recovery expectation of the MPC and a further signal of economic recovery,” the firm noted.
Conversely, Nigeria’s foreign reserves lost 3.3 per cent to print at $33.2 billion compared to $34.3 billion as of the last MPC meeting, pointing to a worrisome development that may lead largely to sustained FX shortage in the system.
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