Members of Nigeria’s monetary policy committee may dwell less on the interest rate hike in the United States, when they enter a two-day meeting starting today, to determine the direction of interest rates in Africa’s biggest economy where growth has diminished.
The United States’ central bank (Federal Reserve), last Wednesday, stepped up the pace of monetary tightening by raising interest rates for only the third time since the financial crisis, much to analyst expectations.
The target range for the federal funds rate was raised to between 0.75 percent and 1 percent.
“In the past, when rates were raised in the US, we tightened to attract investors, but that likely subside at the moment due to pressing domestic challenges,” said Tajudeen Ibrahim, head of research at investment bank, Chapel Hill Denham.
“What we need to do now is stimulate economic growth, and to do that we need to begin to lower interest rates,” Ibrahim said by phone.
The MPC meets amid changing dynamics, relative to the last meeting in January.
It is expected that the fourth quarter 2016 GDP numbers released in February and the more recently published inflation report will be major considerations at the meeting on March 20th and 21st to be held at the CBN Corporate Headquarters in Abuja.
In the fourth quarter, growth improved by almost 100 basis points to -1.3 percent from -2.24 percent in the previous quarter, while inflation slowed for the first time in 15 months to 17.8 percent in February.
Analysts at the Bismarck Rewane-led Financial Derivatives Company are convinced that these factors are likely to sway the committee towards taking up its agenda to pursue a more accommodative stance with respect to interest rates.
Sub-Saharan Africa peers, Kenya and Angola maintained the status quo on monetary policy rates at their last Monetary Policy Committee meeting while Zambia and Uganda reduced interest rates to 14 percent and 11.5 percent respectively.
Meanwhile, the Bank of Japan kept interest rates unchanged at -0.1% and ten-year bond yields capped near zero. However, the Bank of England meeting is likely to be more interesting as we get closer to a 2-year journey which Governor Marc Carney described as ‘unclear’, so there may be twists and turns along the way.
“Monetary policy managers are starting to look more internally rather than tweak policies to suit external factors,” said Ayodeji Ebo, acting managing director at Lagos-based Afrinvest Securities Ltd, who dismissed chances of the US monetary policy having a significant impact on Nigeria interest rate decision due next Tuesday.
“In the case of Nigeria, the MPC would want to see how they can consolidate efforts on the foreign exchange policy because they know high interest rates don’t necessarily translate to increased portfolio inflows,” Ebo added. “But I think they may adopt a wait and see approach at the next meeting.”
Despite hiking interest rates by a total of 300 basis points in 2016, the difficulty in finding enough dollars at consistent rates to repatriate profit barricaded foreign investors from naira assets.
Portfolio investment shrank 70 percent to N284 million year-on-year in the fourth quarter of 2016, from N952 million in the same period of 2015 and 69 percent from N920 million in the third quarter, according to the National Bureau of Statistics (NBS).
The MPC communiqué from the last meeting in January hinted that members would be more focused on internal dynamics than exogenous factors.
“In recognition of the seemingly inevitable structural shift in the global economy, the Committee reiterated the need to be more inward looking and hasten efforts towards economic diversification to support the domestic economy and improve life for the Nigerian people,” the communiqué available on the CBN website read.
The next meeting is the first in which economic fundamentals are taken in isolation of body language and influence, FDC analysts observed in a monthly note to clients.
“The market will be a major determinant and the economic management team will be monitoring policy statements and impact,” the analysts said.
In addition, the meeting will occur one week before the International Monetary Fund (IMF) article IV board meeting.
“The MPC meeting is holding against the backdrop of market reformers versus mixed economy, economic patriots versus rent seeking establishment group and ideological struggle within the APC,” FDC added.
MPC members voted to leave rates unchanged at the last meeting in January.