Analysts Predict Hawkish Monetary Policy in Q2 as Economy Rebounds
Godwin Emefiele - CBN Governor

Analysts Predict Hawkish Monetary Policy in Q2 as Economy Rebounds

  • Analysts have projected that Nigeria’s monetary policy will turn hawkish in the second quarter of 2021 as the economy is expected to rebounds from recession.

Nigeria’s economy growth slipped to negative for two consecutive quarters in 2020 amidst rising cases of coronavirus.

As a result, policy authority stimulus spending and credit channeling into the productive segment at low rates top government agenda.

However, the reverse is expected when the Nigerian economy returns to growth in the second quarter of 2021, as projected.

Then, keeping a low inflation rate will top the apex bank agenda as consumers’ price index is projected to maintain an uptrend for 16 consecutive months.

The CBN has remained focused on its dovish policy stance to support economic growth and credit channeling into the real sector.

However, this policy stance has in a way injured other segments of the economic performance, mostly financial service space.

Specifically, CBN low interest rate environment has continued to impacting the fixed income market and banks performance.

The pressure on banks operations has however been exacerbated following cash reserve ratio debits for failing to meeting loan to deposits ratio target.

In the fixed income, analysts hinted that sentiment remained broadly bearish in the opening trading sessions of the year.

Chapel Hill Denham said in a note said that investors have been trading cautiously ahead of the publication of the Q1-2021 Debt Management Office bond auction calendar.

As a result, the benchmark bond yield curve expanded by an average of 31 basis points (bps) week on week (wow) to 6.63%, with long duration underperforming (+50bps to 8%).

Meanwhile, Front end rates traded mixed. The Nigerian Treasury bill (NTB) benchmark curve eased by 3bps to 0.43%, while the Open Market Operations (OMO) curve expanded by 20bps to 0.99%.

The first NTB auction of the year is scheduled to hold on Wednesday, with the CBN, on behalf of the DMO, expected to offer a total of N232bn to rollover the same maturing amount.

The offer is split between N12.8bn of 91-day, N26.6bn of 182-day and N193bn of 364-day tenors, the previous auction cleared at 0.035%, 0.500% and 1.210% respectively.

“We expect demand to remain strong at the auction, as a result of the buoyant liquidity in the financial system”, Chapel Hill Denham stated.

An OMO maturity is scheduled for Tuesday (N211.25bn), while the first batch (N40.7bn) of January bond coupon payments (N194bn) is expected on Wednesday.

Analysts at Chapel Hill Denham hinted about three key events are expected over the next three weeks that could influence the direction of interest rates in the short term.

“Firstly, we expect the NBS to publish December 2020 Inflation data, which we expect to print above 15.6% year on year as against 14.89% in November”, Chapel Hill Denham noted.

This expected surge was attributed to 56% adjustment in electricity tariff in November 2020.

Secondly, analysts expect the DMO to publish the Q1-2021 bond auction calendar.

“We expect the DMO to make a strong shift from the weak allotment in Q4-2020 (N160bn), as the government begins to implement the 2021 budget”, Chapel Hill Denham said.

Analysts added that given the large supportive liquidity environment in the near term, they expect the DMO to frontload issuances in Q1-2021.

Also, the first CBN MPC meeting of the year is expected to hold later in the month.

Chapel Hill Denham said the committee members will be faced with the option of tightening monetary policy due to macroeconomic stability, or maintain status quo to support the economic recovery as the COVID-19 outbreak worsens.

“Our view is that the MPC will maintain status quo in January, but monetary policy (and balance sheet policy) will likely turn hawkish from Q2-2021 as the economy returns to growth”, the firm positioned.

Against this backdrop, analysts said they are neutral on bonds in the short term and bearish over the medium term.

Last week, the foreign exchange rate remained unchanged at N379.00 and N380.69 at the official and secondary market intervention sales windows, respectively.

However, the naira recorded a significant appreciation of 4.08% (+N16.75) to N393.50 at the I&E window.

The average daily turnover in the I&E Windows shrank by 77.6% wow to US$41.36mn.

Over the coming weeks, analysts expectations is to see turnover improve significantly but still remain lower that than Q1-20 levels (US$350mn daily average).

In the parallel market, the naira remained under pressure, falling by 0.4% or N2.0 to N472.00.

Meanwhile, external reserves sustained uptrend in the New Year, rising by 1.1% month-to-date to US$35.78 billion on 06 January 2021, reflecting the impact of the recent foreign currency loan inflows.

In 2020, the Naira weakened across all segments of the currency market.

In the official window, the naira fell by 19.0% year on year to N379.00, in the I&E window, the naira declined by 11.1% to N410.25 and in the parallel market, it weakened by 23.0% to N470.00.

“In the New Year, we expect easing of pressure on the naira due to improve oil prices and production for Nigeria, and an expected strengthening of foreign exchange reserves which boosts the CBN’s ability to defend the naira.

“However, we think further adjustments are needed in 2021 for liquidity to return to the I&E Window”, Chapel Hill Denham stated.

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Analysts Predict Hawkish Monetary Policy in Q2 as Economy Rebounds