CBN to Keep Rates as Output Gap Remains Widened – Analysts
Analysts at CSL Stockbrokers have predicted that the monetary policy committee (MPC) of the Central Bank (CBN) will hold the monetary policy rate (MPR), and other key rates as the output gap remain widened after tepid economic growth in the first quarter (Q1) of 2021.
“At the monetary policy committee (MPC) meeting scheduled for today and tomorrow, we expect the MPC to keep the policy rate stable at 11.5%”, analysts at the firm said in a report.
Explaining the prediction, analysts said despite the growth trajectory witnessed in the first quarter of the year, the economy remains fragile and significantly weaker compared with the pre-pandemic level.
“As such, a rate hike might worsen the fundamentals”, CSL Stockbrokers said in a report. On the other hand, analysts said although Inflation retreated in April, risks are firmly tilted to the upside.
“We expect this to remain a concern for the committee which should stop any consideration of a reduction in rate”.
Growth sustained, but the output gap remains widened.
Nigeria’s first-quarter GDP showed that economic momentum accelerated by 0.5% compared with 0.11% growth recorded in Q4-2020, according to the National Bureau of Statistics (NBS)
NBS data showed that the reported growth was driven mainly by the non-oil sector which surged +0.8%, supported by 3.4% growth in the Manufacturing and 2.3% in the Agricultural sectors.
On the flip side, the Organisation of Petroleum Exporting Countries (OPEC) production cut commitments led to a contraction in the oil sector (-2,2%) for the fourth consecutive quarter.
“In our view, while the continued recovery of the economy from recession should provide some respite for the committee, economic activities are still fragile, and the output gap remains widened”, CSL Stockbrokers said.
Analysts said as such, a rate hike might dampen fundamentals.
Since the last monetary policy meeting, Naira has been relatively stable across the various foreign exchange windows, support by the elevated crude oil prices.
However, the foreign exchange reserve has sustained a downward trend, on the back of increased FX intervention by the CBN and low impetus for new foreign portfolio inflow (FPI) or hot money.
FPI funds which historically contribute about US$13.4 billion on average to the total FX reserve now account for about US$5.1 billion.
“In our view, as global risk aversion eases, foreign investors’ interest in risky assets in emerging economies should improve. However, despite CBN’s efforts to attract FPI into the economy, foreign investors are likely to remain on the sidelines, save for clarity on FX policy and repatriation mechanism, despite stronger carry trade”, CSL explained.
Recalled the CBN stopped the daily publication of the official rate on its website from 14 May. The investment firm noted that while this may connote FX convergence, analysts said they expect the CBN to provide clarity at the MPC meeting tomorrow.
“If the move is towards unification with the I&E rate at US$410, it would help simplify Nigeria’s intricate FX regime and could provide a slight boost to the government’s oil revenue”, analysts said.
Also, the CBN has continued to manage exchange rate pressure via administrative measures, including the indefinite extension of the CBN’s Naira 4 Dollar Scheme, which offers a N5 incentive for every dollar received as a remittance inflow through licensed international money transfers operators.
“We maintain our view that the policy may likely not be effective, given a wider parallel market premium (18%), which makes it far more lucrative to send money through unofficial channels.
“As such, these administrative measures are unlikely to address the poor FX supply and liquidity, with the FX volume at the I&E window remaining subdued.
“Overall, we forecast the CBN will likely devalue the Naira by about 5-7% by year-end to unlock FX liquidity and curb the external imbalances, which is projected at US$10.80 billion – 2.1% of the GDP – for 2021”, CSL Stockbrokers said.
Risks to inflation are firmly tilted to the upside.
Against consensus expectations, inflation retreated slightly by 5bps to 18.12% in April 2021, the first decline since the border closure in August 2019.
However, this may not be significant enough to sway the MPC, as the inflation rate remains well above the long-run level and as the current sources of inflationary pressure such as security challenges and their effect on food supply and high utility costs remain.
As such, the Committee could either opt for a rate hike or intensify liquidity management measures like the CRR debits. The latter seems more likely and more effective as current inflation is largely supply-driven.
Naira: Official Exchange Rate Falls 92.4% in 5-Year
“Overall, we expect the MPC to hold the MPR rate constant at 11.5%. We however forecast a 50bps hike in the rate in the second half of the year as the output gap is projected to narrow”, analysts added.
CBN to Keep Rates as Output Gap Remains Widened – Analysts
