Monetary Authority Unfazed by Inflation Condition, Keeps Policy Rates
The monetary authority has remained unfazed by inflation condition in Nigeria as policymakers keep key rates at just concluded meeting, the decision which followed consensus analysts’ expectation. The Committee continues to face twin problems – high inflation rate and fragile economic recovery.
Ahead of the meeting, a number of analysts polled by MarketForces Africa had predicted that the Central Bank of Nigeria will keep key rates steady, citing recent disinflation experience and positive Q1 GDP growth.
As projected, the Monetary Policy Committee (MPC) unanimously voted to hold all policy parameters constant at the end of its policy meeting on Tuesday, 25 May 2021. This unanimous vote compares to the 66.7% vote favouring a hold recommendation in the March policy meeting and underscores concerns that the current economic growth remains very fragile.
For the next two months, the benchmark interest rate (MPR) would be maintained at 11.50% with asymmetric corridor remained at +100/-700 basis points around the MPR. Also, the cash reserve ratio held at 27.50% while the liquidity ratio for the banking sector is retained at 30.00%.
Against the CBN’s target of 6-9%, the headline inflation rate in the country has worsened despite a momentary drop recorded in April, which was primarily driven by the Ramadan period. Headline inflation rate printed at 18.12% after it recorded a 5 basis point slide in April amidst worsening output level, steep unemployment condition.
Growth has a soft underbelly, analysts at CardinalStone said in a report predicting that the policy committee will hold key rates. Nigeria’s gross domestic product report for the first quarter released on the eve of the third monetary policy committee meeting signals economic recovery still remains fragile.
Following prior guidance, analysts said that there would be an all-out attempt to combat price pressures if inflationary pressures continue and growth momentum improves.
NBS reported that the inflation rate slides 5 basis points, while GDP growth came at 0.51%, the macro data which analysts believe set a stage for MPC to maintain the status quo.
“Given the weak Q1-20221 growth (Bloomberg consensus expectation was 0.9%) and recent inflation moderation, we believe the committee will prefer to leave policy parameters unchanged at the end of its two-day meeting to ensure consistency with its guidance”, CardinalStone said.
However, analysts said the decision could be supported by plans to raise about $6.2 billion in foreign borrowings and boost remittances – both of which could combine with higher oil prices to ease the pressure to more aggressively raise rates to combat the FX crisis.
Observably, notable global apex banks have opted for inertia to allow their recoveries to gain firmer footing before effecting indicative rate hikes despite reports and expectations of Q1-2021 growths and inflation increases.
CardinalStone said liquidity pass-through is already driving a repricing of yields in the market and narrowing the negative “real” returns in the fixed income space.
“In our view, the reality of low liquidity-induced increases in yields (as macro risks demands) and the lessons from foreign central banks could ease pressure on the MPC to effect any indicative policy change on Tuesday that could charge up the bearish sentiments in the market”, the investment firm explained.
It added that the outlook for yields remains primarily biased to the upside on the impact of narrowing liquidity (which, for us, has been the biggest driver of domestic rate swings in the last 18 to 24 months).
Delving into the Q1-2021 growth dynamics Nigeria’s 0.51% year-on-year growth was driven by the non-oil sector, which rose by 0.79% YoY from 1.69% in Q4-2020 to mask 2.21% deterioration in oil GDP.
Non-oil GDP growth was primarily supported by 7.69% and 2.28% growth in telecoms and Agric GDPs. Telecoms grew at its slowest pace in 12 quarters to possibly reflect restrictions on new SIM registration and fear of NIN-related sanctions in the quarter.
At 22.35%, agric’s contribution to overall GDP came in at the lowest level in four quarters to indicate the likely impact of a soft base effect. Elsewhere in non-oil, manufacturing (+3.40%) exited recession aided by cement and food, beverage, and tobacco, while real estate output increased by 1.77% year on year.
Financial institution GDP growth also moderated to 0.15% from an average of 14.18% across the four quarters of 2020, in line with the milder than expected credit creation in the banking sector. Even though non-oil GDP came in slightly above the waters in Q1-2021, there were significant concerns in trade which plunged 2.43% and 23.75% drop in road transport readings.
Despite some traces of weakness within non-oil, CardinalStone said the soft underbelly of the current GDP reading was mainly evinced by sustained recession in the oil sector, which suffered from another contraction in oil output in the quarter to 1.72mbpd from 2.07mbpd in Q1-2020.
In December 2020, there were reported shutdowns in Forcados and Okono terminals due to suspected leaks on Trans Escravos Pipeline and Mystras— Okpoho subsea pipeline, respectively.
Likewise, Abo, Usan, Ima, and Escravos terminals were shut down for maintenance. Production was also interrupted at Yoho, Agbami, Pennington, Que Iboe, and Erha terminals due to planned repairs/maintenance, fire incidence, pump and flare management.
“We believe these production setbacks may have spilled into the review quarter. We retain a GDP growth projection of about 1.7% for 2021, aided by expected robust outturns in Q2-2021 and Q3-2021 due to the low base effect from the coronavirus affected quarters of 2020”, analysts at CardinalStone said.
In addition, the firm added that the conclusion of repairs and maintenance activities across key oil terminals is likely to support the “black gold’ sector in the coming quarters.
It said more robust growth recovery is also expected to embolden the monetary authorities to fast-track the normalization of rates in the latter parts of the year.
Analysts explained that reducing the MPR is expected to reduce cost of lending with resultant increase in real sector output and possibility of sustaining the current economic momentum.
However, prevailing inflationary pressure -at 18.12% in April 2021 – remains an integral factor to consider in managing the key interest rate.
“We opine that several intervention funds created by the CBN for different sectors of the economy will continue to have a positive impact on the aggregate output”, PAC Capital said. For instance, the country’s Gross Domestic Product (GDP) grew by 0.51% in Q1, 2021 from 0.11% in Q4, 2020.
“Adjusting the MPR at the moment of gradual recovery phase may be premature and have a negative impact on the overall economic performance. Curtailing the current inflationary pressure means there must be a concerted effort by monetary and fiscal authorities to improve economic productivity in the country.
“Provision of tax relief, critical infrastructure, and other incentives in the real sector of the economy are expected to reduce inflationary pressure in the near term. Also tackling the current insecurity challenges and creating an enabling business environment are factors to consider in sustaining the current economic growth”, analysts at PAC Capital said.
“In our view, the decision seems reasonable, as the CBN remains squeezed between the necessity to sustain the real economy, as growth remains fragile and to curb elevated inflation, which remains well above the CBN’s target of 6%-9%.”, CSL Stockbrokers said
Analysts said, therefore, hiking rates, in recognition of increased upside risk to prices and mounting external sector pressures would further constrain economic growth, while a rate cut is likely to intensify inflationary pressures and amplify the currency risk.
Monetary Authority Unfazed by Inflation Condition, Keeps Policy Rates
