MPC: Broadstreet Anticipates No Change to Policy Rate
The Central Bank of Nigeria (CBN) will not adjust the benchmark interest rate, according to Broadstreet analysts’ consensus as the monetary policy committee begins a two-day meeting, the second in the year 2022.
Despite external influences including the Russia-Ukraine war, rising headline inflation rate and foreign currencies pressures are expected to impact policy decisions, analysts projected that apex banks would not rock the boat with adjustment to the interest rate.
Since September 2020, the apex bank has kept the benchmark interest rate at 11.5% despite rising headline inflation rate, in stark contrast to frontier and emerging markets central banks policies resulting in interest rates hike.
The Policy Committee is expected to examine the global economic situation following interest rate hike in the United States, and Britain including persistent adjustment by the European Central Bank.
On the domestic front, short-term inflation expectations will likely discomfort committee members, particularly given the pass-through impact of elevated global energy prices on headline inflation, according to Cordros Capital.
“In our opinion, the Committee will likely lean towards an accommodative monetary policy stance predicated on the need to fully realise gains from previous policy actions geared towards boosting economic recovery.
“We do not expect the Committee to hike interest rates in response to the hawkish monetary policy currently adopted by global central banks”, said Cordros Capital in a note.
In the fourth quarter of 2021, the Nigerian economy grew by 3.98% year on year compared with a 4.03% growth recorded in the third quarter of the same year.
Following a slowdown in 2020 due to pandemic-induced pressures, Nigeria’s gross domestic product grew by 3.40%, reflecting that the economy has recouped all pandemic losses of -1.92% in 2020.
Decomposing the breakdown, analysts at Cordros Capital highlight that the non-oil sector remains the engine of the overall growth. Precisely, the non-oil sector grew by 4.73% year on year in Q4-2021, albeit slower than the 5.44% growth recorded in Q3-2021.
“For us, the growth reflects gains associated with the seasonality effect in the agriculture sector, sustained normalisation of economic activities, and improved credit to the private sector.
“We expect the growth momentum to be sustained in 2022, albeit moderately, as the impact of the favourable base from the prior year dissipates”, Cordros Capital stated.
“We expect the Committee to reiterate the need for CBN to maintain its current interventions to sustain the recovery of output growth, more so that the PMI readings remain sub-optimal.
“Therefore, we believe the preceding would induce the Committee to maintain its dovish stance, albeit with a hawkish tone”.
Although the headline inflation eased marginally in January, given the dissipating impact of festive-induced spending, it increased in February in line with the pass-through effect of higher energy prices on domestic prices.
Headline inflation for the month of February rose 10 basis points to 15.70% following the previous month’s slowdown after December 2021 surge.
“We expect the Committee to express concerns about the pass-through impact of the lingering Russia-Ukraine conflict on domestic prices, particularly as diesel prices continue to soar higher”, Cordros Capital analysts stated.
Since the last policy meeting early in the year, Naira has shed N13 against the dollar at the parallel market and experienced moderate weakness, losing less than N1 at the investors’ and exporters’ foreign exchange window.
Analysts said in the note that FX inflows to the Investors and Exporters Window declined by 7.3% month on month to US$1.06 billion in February from USD1.15 billion in January – the lowest since June 2021 when transaction volume printed at US$966.80 million.
It was noted that the decline was due to a 35.2% month on month and 2.3% month on month decline across the foreign and local sources. On the local sources, analysts highlight that CBN’s FX supply to the Investors and Exporters FX window dipped 9.2% month on month to US$299.40 million; a decline to the lowest since April 2021 when it supplied US$143.20 million.
The preceding suggests that despite the rally in crude oil prices, accretion to the gross FX reserve has been limited given significantly low crude oil production volume and elevated PMS subsidies, analysts explained.
Accordingly, manufacturers whose FX needs are not met at the IEW recourse to the parallel market. Overall, the market expects the gross FX reserves at current levels to comfort the Committee to maintain its current stance as the CBN’s arsenal to defend the Naira remains in a decent position.
Global Central Banks Have Moved to a Tightening Phase – Cordros Capital
On the policy front, global central banks have shifted grounds to a tightening phase to curb heightened inflationary pressures. This is on the heels of supply-demand imbalances caused by supply chain constraints and high energy prices, which has led to continued deviation from the 2.0% inflation target set by global central banks.
For instance, headline inflation hit 7.9% in February 2022– the highest since June 1982 (+8.3%) in the US. In response to this, the US Federal Reserve raised interest rates by 25bps to a target range of 0.25%-0.50% at the end of its latest meeting (16th March).
Similarly, the Bank of England (BOE) raised interest rates for the third consecutive time at its recently concluded meeting (17th March), noting that inflation (5.5% as of January) will remain higher for longer due to Russia/Ukraine crisis.
“We believe global central banks’ tightening of monetary policy will be a recurring discourse at this meeting, given that emerging and developing economies usually experience capital flow reversals as global financing conditions tighten.
“Nonetheless, we think concerns will be tethered by the modalities put in place by the CBN to minimise the exodus of foreign portfolio investments (FPIs) from the economy”. Cordros Capital now expects the Committee to retain the MPR at 11.5% alongside other monetary policy parameters.
However, the firm expects MPC to strike a hawkish tone in light of the tightening of monetary policy by global central banks and the indirect impact of the Russia/Ukraine crisis on domestic inflationary pressures.
“Given the limited option available to the CBN to Reduce, Retain or Increase, we believe that more members of the committee will likely vote to retain the MPR as a reduction in the MPR is not an option for the MPC following the rising rate of the inflation rate.
“However, in light of the recent tightening of monetary policy rates by global central banks and the direct impact of the Russia/Ukraine crisis, we expect the MPC to retain the MPR but improve the CBN intervention in the power and agricultural sectors to reduce the cost of doing business”, according to analysts at Atlass Portfolios Limited.
READ: IEA, OPEC Flag Concerns on Global Oil Demand
#MPC: Broadstreet Anticipates No Change to Policy Rate
