MPC: FSDH, GTI anticipate 0.5% cut in money pricing rate

Nigeria| Experts have said that there are strong indications that members of the Central Bank of Nigeria’s, CBN, Monetary Policy Committee, MPC, may vote to reduce benchmark interest rate to 13% in the next meeting.

This expectation is not unconnected with latest development in the domestic and global economy. FSDH Research expects inflation rate to continue downward trend till October, therefore give room for possible adjustment in policy rate among other factors.

In its new drive to reflate the performance of the economy, the central bank has shown renew interest in supporting broad base growth, and redirecting credits to the real sector of the economy has become its favourite, Consultants at LSintelligence said.

“The thing is, our macroeconomic figures are the working definition of poverty and there is need to reflate performance of the economy. With more than 200 million people, sharing total GDP at about $380 billion and a budget size at just N9 trillion, there is more Nigerians wish for”.

“We must ramp up resources and channel it to growth hacking sectors. In 2018, GDP growth in Nigeria was 1.9%, Morocco with 36 million grew at 3.1%, Tunisia with 11.7 million people grew at 2.5% and Ethiopia with 107 million people grew at 7.7% just as Cote d’Ivoire grew the economy by 7.4% for about 25 million people”, LSintelligence stated.

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.

In its last meeting on 20-21 May 2019, the MPC held the MPR at 13.50%, and retained the asymmetric corridor of +200/-500 basis points around the MPR. Also, both the Cash Reserve Ratio (CRR) at 22.5%; and the Liquidity Ratio (LR) at 30% were retained.

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 is of the view that there will be two possible policy decisions open to members of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) when they meet on 22-23 July 2019.

It said that the Committee can 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 to stimulate growth in the economy all support a rate cut, the firm said.

Such a cut would add weight to the implementation of the CBN’s 5-year strategic plan. FSDH Research hence anticipates a 50 basis points reduction in the Monetary Policy Rate (MPR), as well as a possible adjustment to the asymmetric rates around the MPR.

The short-term forecast of FSDH Research indicates that the inflation rate in Nigeria may continue to trend downwards until October 2019. This is based on the assumptions that there will be no adjustments to the electricity tariff or the pump price of Premium Motor Spirit (PMS).

It noted that the impact of the implementation of the new National Minimum Wage on the inflation rate is minimal. Implications of the foregoing are that there may not be pressure on the MPC to raise the policy rate with a view to taming inflationary pressure.

In the same light, 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 said in the review.

It said, For instance, between the last MPC meeting in May 2019 and now, the U.S. benchmark interest rate has remained unchanged at the range of 2.25% – 2.50%, and there is a strong indication of a possible cut at the next Federal Open Market Committee (FOMC) meeting on July 30 – 31, 2019.

“This expectation could be substantiated by the remark of the U.S. Federal Reserve chairman, Jerome Powell, at the 75th Bretton Woods lecture in Paris, France this week Tuesday”, the firm added.

In coming to term with the estimate, GTI observed that during his presentation in Paris, the U.S. Federal Reserve chairman stated that “despite low unemployment and solid overall growth, factors such as muted state of inflationary pressure below the 2% target, concerns on trade development and global growth, the issues of U.S. federal debt ceiling and Brexit uncertainty have strengthened the case for a somewhat more accommodative stance of policy.”

Hence, this implies that a further cut in Nigeria’s MPR is less likely to trigger capital flow reversal that can put the Nigeria economy in jeopardy.

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.

“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.

VIAJulius Alagbe, Economic & Finance Analyst
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