Why MPC will retain benchmark interest rate at 14% —Analysts

As the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), faces a choice between easing and maintaining status quo on policy rates, analysts have predicted that the committee members will vote to hold all rates constant while consolidating on recent gains in the Foreign Exchange (FX) market.
The MPC is scheduled to meet on Monday (today) and Tuesday, July 24 and 25 respectively.
Analysts at Cowry Assets Management Limited believe the committee will retain the Monetary Policy Rate (MPR) at 14per cent despite recent moderations in inflation rate. This is partly based on anticipated increase in public sector spending, a vulnerable external sector, and the need to ensure positive real returns on investments in order to attract foreign portfolio inflows.
Other analysts at Afrinvest West Africa Limited are of the view that the committee will maintain status quo on a balance of considerations: Retention of the MPR at 14.0per cent ; Retention of the Cash Reserve Ratio (CRR) at 22.5per cent; Retention of the Liquidity Ratio at 30.0per cent and Retention of the Asymmetric corridor at +200 and -500 basis points around the MPR.
The analysts based their prediction on a number of reasons. In the past two years, MPC’s interest rate decisions have lagged market movement, which explains the disparity between short term market rates (as high as 18.7%) and the MPR which is still pegged at 14.0per cent. If there are justifications for easing, the CBN will likely signal this in the primary market for short term securities before making an MPR cut. As it stands, the MPR is redundant as it may not achieve a tightening or easing objective except the CBN signals its objective through market rates.
Also, despite the supposed move to a tighter monetary policy, money supply has been growing astronomically, a contradiction pointed out by committee members at the last meeting. Broad and Narrow money have surged 109.1per cent and 118.8per cent respectively since 2015 year end. This according to Afrinvest,calls to question the success of the “tightening cycle”, as liquidity remains excess enough to destabilize external sector if yields significantly moderate.
“Our view of Interest rate outlook is that despite the moderating headline inflation rate, the CBN will tarry a bit in easing monetary policy due to fragility of the FX market recovery.
A monetary easing will likely dampen the stability seen in the Foreign Exchange market which remains the main monetary policy anchor.
“Of particular concern is the renewed volatility in oil prices and significant spread between interbank and NAFEX exchange rates.
This makes the recent recovery in the FX market uncertain unless a convergence is effected between interbank, parallel and autonomous rates. Whilst the economy has reached an inflection point in terms of growth prospect, the real inflection point for monetary policy will be when FX rates fully converge,” Afrinvest stated in a note to investors.