‘Monetary Policy Unlikely to Achieve QE without Bond Buying Program’
Research analysts at Coronation Merchant Bank said the monetary policy authority may not be able to achieve quantitative easing (QE) without announcing bond buying program going forward into 2021.
In a report, Coronation Research explained that open market operations (OMO) market cannot be run down indefinitely as part of it is foreign-owned and the cash reserve ration cannot be raised indefinitely.
Analysts explained that in 2020 the CBN achieved effects of quantitative easing (QE) without announcing a bond-buying program.
It was noted that the CBN did this (starting in October 2019) by preventing Nigerian institutions from buying new issues of its open market operation (OMO) bills.
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Effectively, the policy impacted gild-edged market, thus reducing the size of the OMO market over time.
Market data shows that from N9.8 trillion in January, OMO market plunged to N5.5 trillion in mid-December, causing these funds to be diverted into the Treasury-Bill and FGN Bond markets.
At the same time the CRR took liquidity from the banking sector into the public sector.
“This can only be done once, in our view”, Coronation Research stated in the report.
Explaining option for financing the budget deficit in 2021, analysts said this could include raising interest rates to attract institutional money and, possibly, expanding the CBN’s balance sheet (as would happen in a conventional QE program).
It was noted that while the aim of increasing bank lending has been achieved, inflation is rising, with headline inflation at 14.89% and food inflation at 18.30% year on year in November.
“We doubt that the CBN wants to address inflation with interest rates, but it may tolerate a rise in interest rates over the coming months as a way of stabilizing public finances”, Coronation stated.
Coronation had asked in a report whether the Central Bank of Nigeria (CBN) wanted to put a floor under market interest rates.
With the recent issuance of special bills by the apex bank with the aim of releasing sterilised funds in the form of high cash reserve ratio to Nigerian banks, analysts think they have an answer.
Coronation explained that the effect of the CBN’s Special Bills issue (bills granted to banks in respect of their excess cash reserve ratio held by the CBN), with a yield of 0.5%, has been to support interest rates.
The report noted that T-bill rates have been rising for two weeks.
“This is a change in the way the market sees interest rates rather than a guarantee that the CBN is in favour of raising them”, analysts explained.
The research unit of the Coronation Merchant Bank said market has seen interest rates crash this year and was wondering whether negative market interest rates would emerge.
It believes that the CBN’s response using N4.1 trillion Special Bills issuance at 0.5% to banks as a way to address liquidity issues caused by its cash reserve ratio.
Officially 27.5% but effectively much higher, hence the excess CRR, analyst think its 0.5% rate was, presumably, a signal to the market.
What options are now open to the CBN?
Coronation explained that 2021 will be another year of significant deficit financing for the Federal Government of Nigeria (FGN), with the result that, according to the draft budget, N5.2 trillion (US$13.3bn) needs to be raised.
It added that from the point of view of the government’s Debt Management Office (DMO) it is preferable to raise this at low interest rates.
‘Monetary Policy Unlikely to Achieve QE without Bond Buying Program’
