Monetary Policy Committee holds key rates
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria hold key rates as it concluded July meeting. The benchmark interest rate (MPR) was held at 13.50%, with asymmetric corridor retained at +200bps and -500bps around the MPR.
Also, the Cash Reserve Ratio (CRR) retained at 22.50% and; the Liquidity Ratio retained at 30.00%.
Analysts’ consensus had been that there that members of the policy Committee may vote to reduce benchmark interest rate to 13%.
Their expectations were anchored on development in the domestic and global economy. These include stable oil price, FX and lower inflation rate.
For example, FSDH Research said that it expects inflation rate to continue downward trend till October, therefore give room for possible adjustment in policy rate among other factors.
With CBN renewed interest in channeling credits to the real sector, general expectation was that the apex bank would consider cost of obtaining funds by the private sector.
Senior Consultants at LSintelligence said in a chat that it is not enough to say banks should lend, but also to influence the rate. The firm stated that the best way for CBN to influence lending rate is by making adjustment to the money pricing rate.
“Even if Banks are willing to lend to the real sector today, there are entrepreneurs that won’t like to borrow at 30%. Taking credits at such rate would mean that your project or business return is more than that. In most cases, that is not what is obtainable”, LSintelligence Associates said.
The CBN has issued two important directives to banks within the last month that indicate its preference in the conduct of monetary policy. These two directives are geared towards stimulating lending to the real sector of the economy to boost economic activity.
However, high cost of capital or interest rate on loans remains one of the big hurdles the apex bank must cross if it intends to boost domestic economic performance as implies from the latest directives to banks.
FSDH was of the view that there will be two possible policy decisions open to members of the MPC. It said that the Committee could vote to either maintain policy rates at the current levels or reduce them.
FSDH reckoned that an increase in policy rates is not an option under the current economic situation in the country.
The short term outlook of the inflation rate, which points to a declining trend, other things being equal, stability in the foreign exchange rate, and the drive of the Federal Government of Nigeria (FGN) and the CBN decision to stimulate growth in the economy all support a rate cut, the firm had said.
Analysts said that rate cut would add weight to the implementation of the CBN’s 5-year strategic plan. FSDH Research anticipated 50 basis points reduction money rate, as well as a possible adjustment to the asymmetric rates around the MPR.
GTI Research also noted that there is enough soft-landing for further monetary policy rate cut.
“We have taken our time to analyze the recent trends of key external and domestic macro indicators that are expected to shape the decision of the apex monetary authority as regards the position of the benchmark cost of debt – the Monetary Policy Rate (MPR), in Nigeria.
“Interestingly, the meeting is coming on the hills of the CBN’s renewed effort towards increasing credit flows to the real sector of the economy; a development that had led the CBN to reducing the Standing Deposit Facility (SDF) by 73.3% to a maximum of ₦2 billion, and also pegged the Loan-to-Deposit Ratio (LDR) of Deposit Money Banks (DMBs) at 60%.
“As regards the external indicators, our analysis revealed that the accommodative interest rate environment in the U.S. and other advanced economies, the mild volatility of crude oil price in the international market, and the waning global growth outlook due to the prolong trade spat among major economies, holds positive for a consideration of a further cut in the MPR to achieve the CBN objective of increased credit flows to real sector”, GTI Research noted.
“Further cut in Nigeria’s MPR is less likely to trigger capital flow reversal that can put the Nigeria economy in jeopardy”, GTI Research stated.
Also, the price of OPEC reference basket crude oil in the international market averaged above Nigeria’s budget benchmark of $60/barrel per litre since the last meeting on May 2019.
This in addition to increased foreign investment inflows since the post-general elections period has helped sustain Nigeria’s foreign reserve above $40 billion.
GTI Research stated that this implies that the CBN is in a good position to sustain the current relative stability in the foreign exchange market even with a mild cut in the MPR.
On the domestic scene, the trends of key macro indicators also suggest that a cut in MPR will aid the current CBN’s stimulus effort.
For instance, the measure of the rate of expansion in manufacturing activities – Purchasing Managers Index (PMI), eased from 57.8 points in May 2019 to 57.4 points in June.
This implies weak expansion in manufacturing activities and could be attributed to the high cost of capital and the poor state of critical infrastructures like power and transportation.
“We believe a further cut in MPR at this time will impact the expansion of the PMI in the coming months through reduced cost of capital.
“Secondly, we believe the spillover effect of a further cut in the MPR will increase the production and employment capacity of the real sector players, as well as the purchasing power of many consumers in the near term”, GTI reckoned.
The research arm of GTI group said, “In turn, we believe will impact the performance of the equity market, as surplus economic agents will likely consider taking new investment, while producers (due to reduced cost of finance) will declare a better dividend”.
A cut in MPR will ease the cost of government’s borrowing in the domestic market which currently averages 11.20% (in the Treasury bills market) and 14.5% (in the Bond market).
Analysts at GTI Research believe that a further cut of the MPR during next week’s MPC meeting will help in achieving the CBN objective of increasing credit flows to the productive sector and boost the boost the growth of the broader economy, GTI stated.
Reference to the government cost of borrowing, FSDH Research said that a major pressure point for the FGN at the moment is the high interest expenses relative to FGN revenue.
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“Although the major cause of this problem is government’s low revenue, the low interest rate environment since January 2019 has helped the Debt Management Office (DMO) to raise cheaper debt for the government than before.
“Unless there is internal or external shock, CBN policies may continue to favour a low interest rate. This may also stimulate lending to non-oil sectors of the economy, provided there are complementary fiscal policies which will improve the business environment” FSDH Research added.
Monetary Policy Committee holds key rates
