Analysts expect MPC to hold interest rate, relax cash reserve

Analysts expect MPC to hold interest rate, relax cash reserve

Ahead of Nigeria’s Monetary Policy Committee (MPC) meeting, analysts expect the Central Bank of Nigeria (CBN) to hold benchmark interest rate, choosing instead to reduce banks’ Cash Reserve Ratio (CRR) as the economy thirsts for monetary stimulus.

The MPC meets next week, May 22 and 23 and if interest rate is kept at 14 percent, it would be for the fifth time in a row, as authorities seek to balance lifting the economy from its first recession in 25 years, with fighting inflation that is at almost double the rate of the target band.

The CRR, which is the portion of deposits that banks must hold as cash, has also remained unchanged at 22.5 percent.

“A lot has changed since the MPC last met,” said Pabina Yinkere, head of institutional business at Vetiva Capital, pointing to a reduction in March inflation, improved dollar liquidity and the launch of the Economic Recovery and Growth Plan (ERGP).

“But there is still some inflationary pressure and a need to make naira assets attractive for foreign portfolio investors. My guess is that the CBN will hold interest rate but cut cash reserve ratio by 250 basis points to 20 percent,” Yinkere said.

Indeed, since the ten-man MPC last met in March, inflation has trended further down, dollar shortages have somewhat eased, and the country’s blueprint to economic revival- the Economic Recovery and Growth Plan, was launched.

A special foreign exchange window for portfolio investors- the Investors’ and Exporters’ (I & E) window- was also created, and is said to have attracted $800 million in the first ten days of lift-off, meaning portfolio inflows have also improved since the March meeting. So much so, that Fx transactions hit an eight-month high in the week the window was created, according to data compiled by BusinessDay.

“We are at a point where the MPC can begin to toy with the idea of loosening some of its monetary tools, as inflation continues on a downward trend,” said Johnson Chukwu, CEO of Lagos-based Cowry Asset Management, assenting to a likely reduction in CRR.

“I can’t verify the figure,” Chukwu said of the $800 million put forward by some traders to have exchanged hands in early days of trading at the new I & E window. “But it’s no surprise, given that the exchange rate at the new window is market reflective, as that will incentivise autonomous inflows.”

The naira closed at N382 per dollar at the I&E window, according to FMDQ, and traded at N386 at the black market, bringing the spread to within N4.

Contrary to expectations for a cut in CRR, Tajudeen Ibrahim, head of research at Chapel Hill Denham, argues that because the CBN wants banks to have less naira liquidity, CRR may not be tapered.

“The recent use of stabilisation securities shows how far the CBN is willing to drain the banking system liquidity,” Ibrahim said. “Against this backdrop, cutting CRR will be contradictory.”

Ibrahim added that while annual inflation may decline in April, the month on month index probably rose, leaving the MPC with no chance of cutting interest rate.

State-data agency, the National Bureau of Statistics (NBS) is scheduled to release April inflation data on Tuesday, May 16, and if inflation further declines as widely forecast, it will be for the third time since February 2017.

In March, the index printed at 17.2 percent, 60 basis points less than 17.8 percent in February, and exceeds the target range of 6 percent to 9 percent. Consumer prices soared ,following a big devaluation last June, which saw the naira shed 40 percent of its value against the dollar, making food and fuel imports more expensive.

Godwin Emefiele, the CBN governor, said at the last meeting in March, that price pressures continue and “loosening benchmark interest rate would exacerbate them, while tightening will portray the bank as insensitive to concerns about growth.”

“If inflation declines to 16.8 percent in April, the MPC will consider a token movement to an accommodative stance,” said Bismarck Rewane, CEO of Financial Derivatives Ltd.

“Policy rate will remain unchanged at 14 percent, while CRR could be shaved from 22.5 percent to 20 percent.”

Ahead of an official statement on Q1 GDP by the NBS on May 30, a week after the MPC concludes its meeting; Rewane estimates 0.5 percent growth.

After a torrid 2016, when GDP contracted by 1.5 percent, Nigeria is largely tipped by the International Monetary Fund and World Bank to exit recession in the first quarter of the year, though by less than 1 percent.

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