Why interest rate may not be changed as MPC meets —Experts

Although recent data on inflation rate, exchange rate and interest rate on fixed income securities in Nigeria have shown temporary improvement, supporting an argument for reduction in interest rate and other measures that can push more money into the financial system economic and financial experts still favour maintainance of policy rates at the current levels.

Supporting this view, Experts from Lagos-based Afrinvest West Africa Limited said “growth has improved, inflation is moderating, and external reserves have strengthened due to a surge in capital inflows post-elections. Despite these tailwinds, “we believe the CBN would maintain all policy rates to manage the delicate balance between growth, inflation and exchange rate stability,” says Afrinvest.

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will hold its second meeting this year on March 25 and 26, 2019. At its meeting in January 2019, 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 also retained the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) at 22.50 per cent and 30 per cent respectively.

Adding to the debate supporting easing of monetary policy is the fact that the general election is past, so the negative impact of electioneering spending on price stability and associated uncertainties surrounding the election may be over.

However, experts at FSDH Research believes the short-term outlook of the Nigerian economy justifies a hold decision on policy rates at the current levels.

SDH Research believes the decision of monetary policy would be based on what will happen to price stability if there is an adjustment to the pump price of Petroleum Motor Spirit (PMS) and the electricity tariff sometime this year.

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Any adjustment of these prices will result in a hike in the inflation rate. FSDH Research believes that with the inflation rate in double digits, as we project it to be by end-2019, may not justify a reduction in rates.

The US Energy Information Administration (EIA) forecasts an average price of Brent Crude of $62.78/b in 2019, down from $71.19/b in 2018.

“This lower oil price, given the OPEC production cut, signifies Nigeria may generate lower revenue in 2019 than in 2018.

“Hence, the need to maintain a tight monetary stance to attract investors into the Nigerian financial system.

“Capital flight or a possible slowdown in inflows from FPIs may exert pressure at the foreign exchange market. Therefore, a rate cut that will reduce the yield on NTBs may not support the objective of a stable exchange rate,” the experts at FSDH suggests in a not to clients.

Similarly, in its general not to clients, Afrinvest says: “We expect the MPC to hold all policy rates at current levels in next week’s meeting:

“Although the case for monetary easing has become compelling, the CBN is more comfortable using OMO instruments to guide yields rather than the MPR. This has already resulted in a moderation in average T-bills and bond yields to 13.2 per cent and 14.2 per cent respectively.

“We do not see the possibility of a rate hike due to weak economic growth, which remains below population and long-term growth rates of 3.0 per cent and 7.6 per cent respectively”