Amidst Rising Threats, Analysts Predict MPC Will Hold Benchmark Rates
Amidst rising threats in the economy, analysts have predicted that the Monetary Policy Committee (MPC) will leave rates unchanged in its first meeting for the year scheduled for January 25 and 26, 2021.
The macroeconomic condition has been faced with pressures following 16 months inflation uptrend, capital flight, external liquidity shocks, and scarcity of foreign investment inflows among others.
At the meeting, Greenwich Merchant Bank said in a note that the Committee is expected to assess its existing policies in line with the recent developments in the international space and their implications on the domestic economy.
“Our analysis posits that the key parameters would be left unchanged”, Greenwich stated.
Analysts said the current monetary policy rate (MPR) of 11.50% with asymmetric corridor at +100/-700 basis points around it, Cash Reserve ratio (CRR) at 27.50%, and Liquidity Ratio at 30% will be sustained.
“On the global scene, we expect the rollouts of COVID-19 vaccinations will top other emerging developments, bearing in mind its impact on global growth”, Greenwich stated.
Already, the International Monetary Fund and the World Bank are projecting that global economic growth should edge up to 3.4% and 4.0% in 2021.
Greenwich explained that this; alongside the achieved stability in the oil market, pandemic-related risks, the just concluded U.S elections, the slew of positive data in emerging markets, particularly from China, should weigh on the Committee’s decisions.
On the domestic front, analysts believe the Committee would consider several factors such as the heightened level of inflationary pressures.
MPC consideration is also expected to include the insecurity challenges, surging Covid-19 cases accompanied by movement restrictions, persistent FX strains, and the downbeat Purchasing Manager Index data, amongst others.
“Ultimately, we envisage the committee would strike a balance between stimulating growth and putting inflationary pressures under control”
At the last MPC meeting, the Committee weighed strongly its options of either hiking, or maintaining status quo.
In view of spiraling inflation, the Committee felt the appropriate decision would be to tighten its current position, as this should stem inflationary pressures, but at the detriment of stimulating credit growth, particularly to the real sector.
“That said, its decision to hold its position came on the heels of the positive results of the Apex Bank’s heterodox policies, which should strengthen the macro-economic environment, and boost productivity across all sectors.
“In addition, we believe the Committee would further urge the government to diversify its revenue base in face of oil revenue volatility, and lingering effects of the coronavirus pandemic”, analysts explained.
Furthermore, Greenwich stated that the passage of the 2021 budget of N13.6 trillion, if implemented with vigour should enhance growth in the economy.
Especially due to increased capital spending, that takes about 30% of the expenditure plan.
“In our view, a tightening stance may appear more appropriate to curb inflationary pressures, ensure capital flights are under control, reduce external liquidity shocks, and even attract foreign investors.
“Still, high inflationary pressures, weak aggregate demand, shrinking job numbers, rising debt levels, and uncertainties clouding the FX environment continues to threaten the strength of the macroeconomic space.
“Our premise for a rate hold is based on two factors.
“Firstly, the burgeoning need to stimulate economic activities and create jobs, in a bid to boost a quicker economic rebound.
“Secondly, the Federal Government’s need to foster a closer co-ordination of monetary and fiscal policies to accelerate growth in the country.
“Thereby, we expect the MPC would retain its current monetary policy stance. We opine that it might take a while for growth to return to its pre-pandemic levels, as domestic demand is set to remain weak.
“However, a low base effect and an anticipated pick-up in the non-oil sector underpins growth in the positive territory”, Greenwich explained.
Chapel Hill Denham is also expecting the MPC to maintain status quo at the meeting – retaining the MPR at 11.5% and holding all variables constant.
The firm hinges its expectation against the backdrop of weak economic output and stronger COVID-19 infection wave forcing more economic restrictions.
It added that notwithstanding, the market will be looking for clues on near and medium term monetary policy direction, which are instrumental to the direction of fixed income yields.
Cowry Asset Management also towed the same line of projection, cited the 9.89% increase in credit to the private sector.
Data from the Nigerian Bureau of Statistics revealed that over the 11 months period 2020, credit to private sector surged about 10%.
Analysts said this further reflects the push by CBN to drive increased production output in joint effort with the fiscal authority.
“However, we are beginning to see a backlash of the expansionary policy stance amid rising inflation rate and weakening Naira against other currencies, especially the greenback.
“…we expect the Committee to further maintain status quo despite pressure on the exchange rate and general price level given the need to further stimulate Nigeria’s fragile economy out of recession.
“We note that the direction of interest rates may generally trend northwards at some point further afield in 2021 amid expected increase in borrowings by the fiscal authority to fund its budget deficit”, Cowry Asset stated.
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Amidst Rising Threats, Analysts Predict MPC Will Hold Benchmark Rates
