MPC Will Keep Policy Rates to Drive GDP Rebound Further
Godwin Emefiele, CBN Governor

MPC Will Keep Policy Rates to Drive GDP Rebound Further

A raft of reports from analysts have indicated that the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will keep benchmark policy rates to drive the gross domestic product (GDP) to rebound further, the prediction was made ahead of the meeting schedule for July, 26 and 27, 2021.

Some economists polled by MarketForces Africa said it is unlikely to see an upward or downward adjustment to benchmark rates numbers after the meeting. They added that rates increase unlikely though fixed income investors await such catalyst that could drive yields on government securities.

Data from the National Bureau of Statistics shows that Nigeria’s economic growth remains fragile post-lockdown following a 0.51% jump in the first quarter of 2021 after about a 2% year on year drop in 2020.

Amidst the reported slowdown in the CBN purchasing managers index, other macroeconomics indices stand strongly against an expectation of an improved economy including rising inflation and local currency devaluation.

However, analysts believe that recovery in economic activities, albeit moderate, against low base effects from the prior year could raise the GDP figure for the second quarter (Q2). 

Also aiding pressure on economic recovery is the downside risks which recently surfaced in the global economy as the covid-19 delta variant continues to spread strongly in some parts of Europe, Asia and America among others.

At 33.3% at the last count in Q3-2021, the level of joblessness remains stubbornly high and unimpressive given the increased youth population. The current situation has widened the misery index despite moderation in inflation worries.

The food price index has remained heavy in a country that continues to witnessing serial currency devaluation and a high unemployment rate amidst a growing youth population.

According to analysts’ reports, the fourth MPC meeting will support Godwin Emefiele, the CBN Governor, pro-growth stance and upward rate adjustment quite unlikely as inflation rate moderates for three consecutive months.

Cordros Capital analysts said in their report that, “On a balance of factors, we expect the Committee to maintain the status quo on all monetary policy parameters at this meeting”.

However, analysts said they are expecting the underlying tone of the Committee to be neutral, given the still elevated domestic inflationary pressures and imbalances in the external sector.   

In a report, Afrinvest analysts also said they do not anticipate Committee members to vote unanimously as the case during the May MPC’s meeting.

“We expect the voting pattern to tilt in favour of retaining policy parameters as the nation awaits the Q2:2021 GDP performance numbers”, analysts said in the report.

Looking at the Nigerian economy from the local lens, analysts painted gory macroeconomic results thus far with external reserves declining heavily amidst increased global oil prices.

“Based on our analysis of most key considerations for the MPC, we project a retention of all policy parameters at current levels – monetary policy rate (MPR): 11.5%, Asymmetric Corridor around MPR: +100/-700bps, cash reserve ratio: 27.5%, and Liquidity ratio: 30.0% respectively”, said Afrinvest in the report.

Explaining the investment firm’s position, analysts recognised that the headline inflation rate has moderated twice since the last MPC in May to 17.8% (June 2021) from 18.1% in April. As such, they expressed believe this provides a boost to the price stabilization objective of the CBN.

Broad money supply (M3) and credit to the private sector have both increased by 1.8% and 0.7% respectively from levels last seen at the May MPC meeting to ₦ 39.8 trillion and ₦ 32.1 trillion.

“We believe this trend supports the MPC’s drive for credit expansion to the real sectors to boost aggregate production and consumption”, Afrinvest said.

The firm also noted that the domestic equities market All-Share Index has gained 1.1% since the last MPC meeting to print at 38,667.90 index points from 38,233.68 index points as of May 26, 2021.

Analysts said this is also a boost to the capital market recovery expectation of the MPC and a further signal of economic recovery.

Conversely, they noted that Nigeria’s foreign reserves lost 3.3% to print at $33.2 billion compared to $34.3 billion as of the last MPC meeting.

“We believe this is a worrisome development and it points largely to sustained FX shortage in the system”.

Domestic economic activities continue to expand, albeit slowly, on account of the sustained opening of the economy increased cross-border activities; the lagging impact of government intervention to critical sectors and rally in oil prices, Cordros Capital said in its report.

It noted that since the last policy meeting in May, economic activities have continued to improve despite the emergence of a delta variant of the COVID-19 virus worldwide (first spotted in Nigeria on 8th July).

Given the impact of lockdown measures on activities last year amidst weak public finances, analysts said they do not think the government will rekindle lockdown measures, adding that efforts will be concentrated on improving vaccination and creating awareness to the citizens on the potential impact of a third wave.

Analysts at Cordros Capital projected that Nigeria’s GDP will balloon 3.37% in Q2-2021 from 0.51% reported in the Q1 of the same year, anchored on the favourable base effect of the prior year amidst moderate improvement in economic activities.

In expressing their view, analysts said they believe the Committee would be cautious with the growth outlook given that the Q2-21 GDP figures would be flattered by a favourable base effect from the prior year.

“With the domestic economy still vulnerable to external shocks, we believe it would induce the Committee to favour standing pat on its monetary policy decisions”, Cordros added.

Read Also: Monetary Policy Committee Holds Benchmark Interest Rate at 11.5%

It posited the magnitude of increase in inflationary pressures continues to moderate, suggesting that the inflation rate for 2021 might have reached its peak in March when it printed at 18.17% year on year, barring no major shock over the rest of the year. 

MPC Will Keep Policy Rates to Drive GDP Rebound Further