MPC not expected to cut interest rates despite 1.4% GDP growth

by | November 21, 2017 12:30 am

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), which started its last meeting of the year yesterday is due to announce its decision on key rates this afternoon and analysts do not expect a movement on rates despite economic growth which printed at 1.4 percent for the third quarter (Q3) of 2017.

In order to determine policy directions for key monetary variables in the near-term, the Committee has been reviewing among others, the current state of the local and global economies with more emphasis on changes in key macroeconomic indicators in the domestic economy.

The current tight monetary policy stance was justified by MPC in order to maintain stability in the foreign exchange (FX) market and determination to curb the high inflation rate.

At its September 2017 meeting, the MPC maintained the Monetary Policy Rate (MPR) at 14 percent, with the asymmetric corridor at +200 and -500 basis points around the MPR; and retained the Cash Reserve Requirement (CRR) and Liquidity Ratio (LR) at 22.50 percent and 30 percent respectively.

Nigeria’s inflation rate is currently at 15.91percent. The headline rate continues to fall at a slow pace by 0.8 percent month-on-month (m/m) in October. Oil price has risen to $61.86 per barrel while the nation has witnessed accretion in external reserves at $34.3billion, even as the third-quarter (Q3) GDP grows by 1.4percent.

Naira has been stable against the dollar at N360. The latest NBS GDP figures show that the Nigerian economy grew by 1.4percent year-on-year in real terms in the third quarter of 2017 (Q3 2017).

Godwin Emefiele, governor of Central Bank of Nigeria (CBN) two weeks ago hinted that monetary policy stance could change when the underlying fundamentals become supportive.

Within the analysts’ community, some believe that the short-term outlook of the Nigerian economy favours a monetary policy easing, others say little warrants any change from the MPC.

Research analysts at Vetiva Capital Management expect MPC to maintain the monetary policy status quo heading into 2018. The analysts said their forward guidance from the September MPC meeting “suggests the MPC has adopted a wait-and-see approach to economic developments until first-quarter (Q1) 2018, a decision vindicated by the stickiness of economic variables between its September and November meetings.”

With inflation little changed in the last few months, Vetiva sees it giving the MPC little room to tilt away from its tight monetary policy stance.

Also, analysts at another Lagos-based investment firm, Cowry Asset Management Limited who expects the MPC to retain the benchmark interest rate MPR, at 14percent said, “Our opinion is partly predicated on anticipated increase in public sector spending, in addition to anticipated increased seasonal household spending amid end-of-year festivities.” A key consideration will also be likely increase in interest rate in the United States amid improving economic developments, they said.

In addition, analysts at Afrinvest Securities Limited do not expect the rate cut today “as Headline Inflation is still far off from the target range of 7 to 9 percent and above the benchmark policy rate (14 percent).

Ahead of MPC meeting decision today, Meristem Securities analysts expect Monetary Policy Rate (MPR) to “stay flat ahead of stronger recovery in 2018.”

“While we observe the improvements in some economic indicators such as external reserves, FX liquidity, inflation rate amongst others, the economy still remains in a fragile state of recovery. A change in the current stance may therefore distort the gains achieved thus far. We therefore expect the MPC to maintain rate at the current level,” Meristem analysts said.

Financial Derivatives Company (FDC) analysts justified a cut to the Monetary Policy Rate in a high inflation environment, noting that a lot will be gained from reducing the MPR in Nigeria. “The increase in prices that may accompany such decision will still be outweighed by a long run decline,” FDC adds.

“The idea of enduring more pain to assuage an existing pain could be a strategic directive in Nigeria’s macroeconomic modelling. The country needs to take a different approach in order to avoid being stuck on a path of taking the same measures with the same results,” Financial Derivatives said.

FSDH analysts in their short-term outlook favour monetary policy easing. “Looking at the short-term outlook of the Nigerian economy, the MPC may be inclined to commence a monetary policy easing to signal the end of a tightening cycle. The monetary policy easing may come in the form of a marginal drop in the MPR or an adjustment in the asymmetric corridor around the MPR,” said FSDH analysts.

For FBNQuest analysts, the Committee likes to say that supply-side constraints are responsible for the pick-up in inflation and the (now-ended) recession.

They said that the MPC’s ability to encourage growth “is constrained by the ‘disconnect’ between its benchmark rate and those for the real economy, as well as by the high concentration of banks’ loan books both sectorally and in terms of company size. In contrast, fiscal policy has greater capacity to encourage growth”.

“Without wanting to suggest that the committee has been emasculated, easing by the MPC does not automatically benefit borrowers in the real economy. The stability of the FX rate in the various windows in recent months has clearly been a positive. If this is maintained, which is our expectation, we should see sharper falls in the headline rate y/y in H1 2018 as strong m/m increases from February to June this year drop out of the calculation. The monetary authorities could then return to the path of easing.”