MPC to Keep Policy Rates but Soften Dovish Tone, Says Cordros
Godwin Emefiele, CBN Governor

MPC to Keep Policy Rates but Soften Dovish Tone, Says Cordros

To avoid alteration to the ongoing recovery path, the Central Bank Monetary Policy Committee (MPC) is expected to keep its accommodative stance on the Nigerian economy but soften the dovish tone, Cordros Capital said in a pre-MPC note.

The committee is expected to hold its penultimate meeting of the year on the 16th and 17th of September 2021. In its July meeting, the monetary policy authority maintained the status quo on policy rates as inflation worries slow down.

CBN has continued to support easy monetary policy that seeks to expand the money supply to drive economic growth, the development that has made the cost of borrowings lower, especially for blue-chip companies but negatively impacts net interest margin in the banking sector.

Similarly, the CBN stance has kept yields on the fixed income market instruments lower despite the steep inflation rate position.

In the second quarter, Nigeria’s gross domestic products expanded 5.1% after a tepid growth reported in the first quarter, a development which analysts believe would be considered by the policy committee in the September meeting.

Analysts recognise that base effects flattered the Nigerian economy growth in the period considering the damaging impacts of covid-19 on productive activities across sectors in 2020.

Cordros Capital said this marked the third consecutive quarter of growth since the pandemic-induced recession in Q3-2020. However, analysts noted the growth was not broad-based as it was largely concentrated in the Trade, ICT, and Utility subsectors.

Trade increased by 22.49% year on year in the second quarter compared with a slide of -2.43% in the first quarter of the year. Similarly, ICT saw a 5.55% year on year as against +6.47% growth reported in the first quarter and Utilities sub-sector expanded 78.16% compared to 8.66% jump in the prior period

Meanwhile, growth in the Agriculture sector at 1.30% year on year represents a slowdown from the +2.28% uptick recorded in the first quarter of the year.

This happened to be the lowest since Q2-2018 when the sector reported 1.19% year on year growth as persistent security challenges and seasonality effect outweighed the impact of government fiat-led intervention to the sector.

“We expect the economy to grow by 3.76% year on year in Q3-2021, primarily driven by the favourable base effect from the prior year”, Cordros analysts projected.

Consequently, analysts think the Committee would be cautious with the growth outlook given that the Q3-2021 GDP figures like the Q2-2021 numbers would be flattered by a favourable base effect from the prior year.

Besides, analysts noted that the growth is still uneven, even as the domestic economy remains vulnerable to external shocks, saying the fragile recovery process would induce the Committee to favour standing pat on its monetary policy decisions.

In its consideration for consumer price index data, analysts revealed the expectation that the Committee will reiterate that the sustained moderation in inflationary pressures is due to the CBN’s intervention to boost output in the critical sectors of the economy.

Given the slowdown in the Agricultural sector’s output in Q2-2021, Cordros Capital analysts said they expect the Committee to reiterate the need for the Federal Government to step up its fight against insecurity and improve critical infrastructure to make the business environment more conducive.

“Against this backdrop, we believe the Committee will feel the need to maintain its monetary policy stance to allow its interventions to continue to support recovery in economic activities”.

Exchange Rate Stables at IEW but Goes Wild at the Parallel Market

Analysts said since the last policy meeting in July, the Investors and Exporters Window (IEW) exchange rate has depreciated marginally by 0.3% to N412.75/$ as of 13th September.

At the same time, the parallel market exchange rate has depreciated by 9.3%, with a year to date depreciation of 15.6%. Analysts recall that the CBN Governor announced the discontinuation of the sale of FX to the BDCs at the July meeting, given their rent-seeking behaviour.

Since then, the parallel market exchange rate has depreciated to N557.00/$ as of the time of writing from N505.00/$ on 27th July when the announcement was made.

Nigeria’s gross foreign exchange reserve has increased by $1.53 billion, representing a 4.6% jump since the last policy meeting to $34.86 billion as of 10th September 2021.

According to Cordros Capital, the increase is tied to the IMF’s disbursement of Special Drawings Rights (SDR) worth $3.35 billion to the country. However, the gross FX reserve is yet to capture the total amount, given that it is calculated based on a 30-day moving average.

“We expect the gross FX reserve to sit at $36.52 billion by 30th September, when we expect the SDR to have fully reflected in the FX reserve”, the firm said in its pre-MPC note.

In addition, analysts said they expect the Eurobond issuance ($3.00 billion) in October to further support the FX reserve accretion over the short-to-medium term. Thus project the local currency to remain relatively range-bound between N410.00/$ – N415.00/$ at the Investors and Exporters window.

Global Central Banks Signaled Tapering Asset Purchases

In the note, Cordros explained the Governing Council of the European Central Bank has already guided that the pace of monthly asset purchases will moderate, albeit the Council did not provide further details on the tapering schedule.

“For us, the reluctance of the Council suggests that uncertainty regarding the evolution of the pandemic could mean that early reduction of asset purchases may undermine the progress made in supporting economic recovery and pushing inflation higher.

“As such, we think the Council will continue to assess incoming data in the short term and provide factual information on the timing of the complete withdrawal of the pandemic-induced stimulus package at the December meeting.

“Similarly, we believe concerns over rising infection rates in the United States and the weak job market data in August will likely make the Federal Reserve kick back providing a timeline on winding down its asset purchases at its September meeting slated for 20th and 21st.

“Overall, we believe the Committee will strike a neutral tone on the global economy’s health, and the attendant impact of reduced monetary stimulus on capital flows into emerging markets and exchange rate pressures”, Cordros Capital detailed. 

Analysts concluded that the Committee to maintain the status quo on all monetary policy parameters at this meeting, saying the Committee will soft-pedal its dovish tone in the light of mounting external sector pressures amidst risk factors that could reverse the downtrend in inflation. 

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MPC to Keep Policy Rates but Soften Dovish Tone, Says Cordros