Policy Rate: Firm Predicts Hawkish Outcome, Cites FX Concerns
While most analysts are predicting that the Central Bank of Nigeria’s policy committee will keep rates steady, analysts at Chapel Hill Denham said they see a hawkish move with the possibility of 50 basis points upward adjustment to benchmark interest rate.
Supporting Federal Government for inclusive growth, the apex bank has remained pro-growth with a number of policies targeted at reflating the performance of the Nigerian economy while maintaining a dovish stance on rates.
But inflation rate has been threatening, threatening the CBN’s inflation targeting of 6-9%. However, the CBN believes the uprising in headline rate is due to supply chain disruption –an aftermath of the economic lockdown in the first half of 2020.
However, the investment firm said this in a report, saying its baseline expectation is for a hawkish outcome, possibly +50bps hike in policy rate (MPR) to 12.0%, due to exchange rate concerns and elevated inflationary pressures.
It said the trend in the exchange rate continues to trade within a narrow band across all segments of the foreign exchange (FX ) market, particularly, at the investors and exporters window, the Naira depreciated slightly by 0.08% against the USD to close at N412.
Recalled that last voting pattern by the members of the CBN monetary policy committee indicated possible rate adjustments mood has been triggered after 19 consecutive inflation rise.
However, in April, Nigerian recorded a 5 basis point slide in inflation rate but analysts’ reactions indicated that the drop was as a result of the Ramadan festival.
Meanwhile, scarcity of foreign exchange has put pressure on Naira, resulting in a declining ability to protect the local currency in the foreign exchange market.
The Nigerian external reserve has dropped behind $34.5 billion due to CBN weekly intervention amidst low accretion while foreign investors’ participation in the economy remains low.
Last week, FX trading activity level weakened in the Investors and Exporter Window, as average daily turnover moderated by 8% week on week to a weekly average of US$102.2 million, from US$111.4 million in the prior week.
In the parallel market, the Naira depreciated by 0.2% to N485.00/US$ amidst tepid economic growth reported in Q1. The economy grew by 0.51% year on year, making this the second consecutive growth since the COVID-19 induced recession.
In the fourth quarter of 2020, GDP had jumped 0.11%.
The growth was anchored by the non-oil sector, which expanded by 0.8% as against 1.7% reported in Q4-2020 Notably, the manufacturing sector spearheaded the growth in the non-oil leg.
Elsewhere, the oil sector declined at a slower pace, by 2.2% in Q1-2021 from 19.8% in Q4-2020, reflecting Nigeria’s compliance with OPEC+ production cut, which drove oil production lower by 16.9% year on year to a 4-year low of 1.72mb/d.
“We expect the recovery to linger, owing to full economic reopening on compliance fatigue and vaccine rollout, higher oil prices as well as the impact of a favourable base effect from the prior year”, Chapel Hill Denham said.
Policy Rate: Firm Predicts Hawkish Outcome, Cites FX Concerns
