Experts Say Stability in Key Indicators Support Monetary Policy Easing
Godwin Emefiele - CBN Chief

Experts Say Stability in Key Indicators Support Monetary Policy Easing

As the monetary policy committee (MPC) of the Central Bank of Nigeria sets to meet March 25th and 26th, some experts have said that recent data on Nigeria’s inflation rate, exchange rate and interest rate on fixed income securities have shown some improvements, a respite for monetary policy easing. 

On the positive direction of the nation’s key macroeconomic indices, stakeholders say they expect the MPC of the CBN to find ground for stimulating domestic economic with its policy direction.

However, in spite of these green light across macroeconomic indices, investment banking firms are of the opinion that rather than rates cut or hike, the committee will likely hold rates to ensure its ability to manage delicate balance growth, inflation and FX stability. 

FSDH Merchant Bank Limited in its research note said that; “the temporary stability in key indicators in the first quarter of 2019 may support an argument for monetary policy easing”.

MPC has consistently held the policy rate at 14 per cent for 15th consecutive times when the market anticipates a reduction in the interest rate and other measures that can push more money into the financial system.

According to FSDH, adding to the debate supporting an easing of monetary policy is the fact that the general election is now behind us, so the negative impact of electioneering spending on price stability and associated uncertainties surrounding the election may be over.

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

According to analysts at Meristem Security Limited in its research note said; “we expect the MPC to consider the key happenings and developments in the global space and the outlook that could shape the global financial market in 2019.

“We expect considerations to be given to monetary policy in the US, the ongoing trade war between US and China, unfolding developments surrounding BREXIT and the expected slowdown in global growth”.

The firm reckons that the need to sustain gains enjoyed so far is pertinent and will significantly influence the decision of the committee.

The Committee is also expected to consider shrinking real rate of return as yields fall faster than inflation, the slow pace of economic growth (GDP reported at 1.93percent for 2018oil price volatility and its effects on reserves, the possible delay in policy creation and the 2019 budget, amid other concerns.

Experts Say Stability in Key Indicators Support Monetary Policy Easing
Godwin Emefiele – CBN Chief

“In view of the above, we expect the MPC’s decision to tilt towards holding the benchmark rate constant, in order not to distort the progress achieved thus far in promoting price stability and supporting growth”, Analysts at Meristem noted.

Afrinvest, one of the leading investment banking firms also noted that on the domestic scene, 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.

The investment banking firm is of the view that Central Banks in advanced economies have held off on further interest rate hikes and economic stimulus is gaining steam due to the slowdown in the global economy.

This is the case for the US Fed, which retained all policy rates this week. Similarly, the ECB intends to sustain monetary stimulus until inflation nears the 2.0percent target and growth recovers.

“We are seeing progress in the US and China trade spat which was suspended for negotiations in December 2018. The deadline to reach a trade agreement elapsed on March 1, 2019.

However, both countries have extended trade negotiations and there is rising optimism on the possibility of a trade deal that works for both parties”, Afrinvest reckoned.

In the United Kingdom, BREXIT continues to fuel uncertainty about the economy. Prime Minister May’s BREXIT deal was rejected by the parliament and there is now an even possibility of a no-deal BREXIT or a delay till mid-year.

The recent economic data releases by the National Bureau of Statistics (NBS) show sustained positive momentum in the economy. Economic growth reached 1.9percent in 2018, the highest in three years.

This performance was mainly due to the non-oil sector which expanded by 2 per cent while the oil sector grew slightly by 1.1 per cent.

Similarly, consumer prices have remained stable, with inflation decelerating to 11.37 per cent and 11.31 per cent respectively in January and February 2019. For the external sector, the performance was mixed in the fourth quarter of 2018.

While the current account balance staged a recovery to positive territory at 1.0 per cent of GDP in the fourth quarter of 2018 from -1.4 per cent in the previous quarter, capital importation was weak at US$2.1 billion compared to US$2.8 billion in the prior quarter.

This was not unexpected given domestic political risks and monetary tightening in advanced economies which spooked investors. Upon the conclusion of the Presidential election in February 2018, political risks have receded.

“We observe that a stable political environment and accommodative monetary policy have renewed foreign investor’s interest in the Nigerian market, with the money market as the destination”.

Post-elections, yields have moderated by 47 basis points, bps, and activity level in the investors & Exporters (I&E) Window between February and March to date has strengthened by 11.3 per cent.

Consequently, external reserves increased by US$977.6 million to US$43.5 billion between February and March 2019. This has supported continued exchange rate stability and we expect this to be sustained in the short term. 

“We expect the MPC to hold all policy rates at current levels in this week’s meeting: Monetary Policy Rate at 14 per cent, Cash Reserves Ratio at 22.5 per cent and Liquidity Ratio at 30 per cent.

Although the case for monetary easing has become compelling, the CBN is more comfortable using OMO instruments to guide yields rather than the MPR”, Afrinvest noted.

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This has already resulted in moderation in average T-bills and bond yields to 13.2 per cent and 14.2 per cent respectively. However, this strategy is unlikely to be supportive of growth given that interest rates in the real economy would remain high.

“Although members expressed concerns about the fragile state of the economy in the last two MPC meetings, we believe the power to adjust yields to attract and sustain capital flows as of and when needed supersedes this.

“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 per cent and 7.6 per cent respectively”, Afrinvest remarked.

Codros Capital also expect the majority of its members to elect to leave policy parameters unchanged. The firm anchored it view on the apex bank’s intolerance for FX volatility, which has remained at the core of its policy thrust.

“Clearly, the troika of the recent surge in foreign portfolio inflows, naira stability, and descent in headline inflation, should have ordinarily ignited an accommodative policy stance”, the firm stated.

“Nevertheless, we expect the MPC to remain cautiously optimistic in a bid to consolidate on currency gains thus far. Farther out, given the still shaky crude oil price outlook, elevated maturity profile in the latter part of the year and its implication on the naira, and perceived upside risk to inflation, we see lower chances of a rate cut over the rest of the year”, Analysts at Codros capital said.

FSDH notes that the increase in the price of crude oil, the current position of the external reserves and the increase in Foreign Portfolio Investments (FPIs) have provided short-term stability for the value of the Naira. The yield on the 364-day Nigerian Treasury Bill (NTB), which was 17.65% in January 2019, dropped by 3.57% to 14.08% last week.

“It is very unlikely that foreign investors will be willing to buy NTBs below the current yields. Capital flight or a possible slowdown in inflows from FPIs may exert pressure in 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”, FSDH remarked.

Experts say stability in key indicators support monetary policy easing

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