Experts predict MPC will hold rates, say hike or cut could hurt growth

Ahead of the rescheduled Monetary Policy Committee meeting of the Central Bank of Nigeria, Meristem Securities, Vetiva and others have predicted that the policy rates would be maintained.

The MPC is scheduled to hold its third meeting of the year on the 28th of May 2020 where it will considered developments in the economy.

Analysts explained that an attempt to cut rate would afford foreign investors to move out funds.

Meanwhile, a rate cut would undermine government drive to stimulate economic growth in the face of global disruptions.

Already, the real return in the fixed income market has declined significantly due to lower interest rate environment.

Pundits had explained that lack of foreign exchange liquidity held foreign portfolio investors from exiting the economy.

Analysts stated that the deliberations at the meeting are expected to focus on analyzing the recent developments in the global economy in line with the existing monetary policy framework, while taking necessary steps to soften the impact of an economic downturn.

One of the major considerations at the meeting will be the assessment of COVID-19 impact on the global economy, analysts stated.

External reserves has fallen due to low foreign receipts inflow that emanated from weak oil price.

For the petrol-dollar powered economy, foreign receipts from oil still account for more than 90% of its export revenues.

Meanwhile, oil prices have taken a beating in recent months due to significantly reduced demand, along with supply side tensions.

Meristem said this poses a major threat to the country’s fiscal and monetary stability due to the importance of oil prices to the domestic economy.

Furthermore, global supply chain disruptions caused by the virus also pose dire consequences for local producers.

“We expect these deliberations to be on the front burner as the Committee seeks to proffer policy actions to mitigate their impact on the domestic economy, analysts at meristem stated”, Meristem stated.

Also, headline inflation has continued to soar, while the restrictions in economic activity due to the spread of the virus has hampered domestic growth.

Meristem said it expects these to be key considerations to the Committee, along with the dearth of liquidity in the FX markets.

“With the above considerations in mind, we expect the MPC to keep policy parameters unchanged, while continuing its use of unconventional tools to achieve desired objectives”, Meristem remarked.

Also, Vetiva capital explained that taking the build-up in inflationary pressure into consideration, it expects the MPC to maintain its current monetary policy stance amidst rise in external and fiscal risks.

According to Vetiva, a rate cut could be counterproductive for inflation amid a soaring economic outlook, while a hike could undermine the ongoing efforts to stimulate growth.

“We believe the CBN will be more focused on the transmission of its unconventional policies to the economy, rather than taking action”, it added.

In the review, analysts expressed that growth in the oil sector was predominantly driven by stable production output and favourable prices while the non-oil sector benefited from the CBN’s effort to channel credit to the real sector.

“Now, almost all the fundamentals which supported economic growth are being threatened as the COVID-19 manifests its far-reaching impact on the domestic environment”, analysts stated.

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Specifically, the Nigerian manufacturing sector continues to grapple with the adverse effect of the COVID-19 on global supply chains and manufacturing activities.

In March, the manufacturing PMI expanded at a much slower pace relative to February while the non-manufacturing PMI contracted for the first time in 34 consecutive months.

The manufacturing PMI was reported at 51.1 index points down from 58.3 index points in February 2020, while the non-manufacturing PMI settled at 49.2 index points from 58.6 index points in February 2020.

Although the CBN is yet to release its PMI report for April, we expect the nation-wide shutdown to weigh on manufacturing activities, analysts stated.

Meristem Securities expects the Committee to hold key parameters constant while focusing on implementing measures such as the intervention funds to boost real sector output and ease the recessionary impact of the Coronavirus on the economy.

Panic Buying and Higher Input Costs Trigger Inflationary Pressures – Analysts

The Consumer Price Index (CPI) edged higher by 12.34% for the eighth consecutive month in April 2020, representing an eight basis points (0.08%) increase from 12.26% in March.

The upsurge in rate was driven by a combined rise recorded in both CPI sub-components.

The food sub-index increased for the 25th consecutive month to 15.03% from 14.98% in March 2020.

The announcement of a lockdown in Lagos, Abuja and Ogun states triggered panic buying of food stuff and household consumables, thereby resulting in a spike in prices.

Similarly, core inflation showed a significant rise of +25bps month on month to 9.98% as the impact of the illiquidity in the foreign exchange market and technical adjustment in FX rates weighed on manufacturers’ input costs.

Experts predict

Rise in the prices of medical services and pharmaceutical products amongst others, pressured the movement in the sub-index, Meristem’s analysts held.

While price stabilization remains a key consideration for the Committee, analysts said they expect the current focus to be on stimulating economic activities.

Hence, we expect the Committee to hold rates, analysts at Meristem expressed.

Experts predict MPC will hold rates, say hike or cut could hurt growth

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