Preparatory to the meeting of the Monetary Policy Committee of the Central Bank of Nigeria (CBN), which commences tomorrow, a retreat was held on Friday and Saturday for fiscal and monetary authorities, which included Minister of Finance, Kemi Adeosun; Minister of Budget and National Planning, Senator Udoma Udo Udoma; and Minister of Industries, Trade and Investment, Dr. Okey Enelamah. The retreat also had in attendance members of the academia, which included professors of economics, senior bankers, and MPC members.
The purpose of the meeting was to widen the consultation of MPC on monetary policy initiatives and ensure harmonisation between the fiscal and monetary authorities. Their meeting, which started on Friday and continued on Saturday, will now inform what would be discussed at the MPC meeting tomorrow.
Meanwhile, when the MPC begins its two-day meeting monday, analysts believe that adjustment to the policy rates is not likely to be on the card. This is because, while the current macroeconomic indicators are favourable, it is necessary to monitor the trend in the coming months before taking a policy decision.
Analysts, who pointed out that the reduced inflation rate and improvement in foreign exchange situation, (which has impacted the naira favourably), have helped in stabilising the markets and reducing pressures in the economy, advised the MPC to tread cautiously and not be too hasty in making new monetary policy pronouncement.
For the first time in 15 months, the consumer price index (CPI), which gauges inflation, reversed the rising streak, having stood at 17.78 per cent in February, representing 0.94 per cent reduction from 18.72 per cent that it recorded in January. This is expected to affect interest rates positively. This followed the improvement in the gross domestic product (GDP) growth rate, which closed 2016 at -1.5 per cent, better than the -1.7 per cent predicted by the International Monetary Fund (IMF).
Besides, there had been consistent accretion to the foreign exchange reserves, which has translated to interventions in the interbank forex market by the CBN, which has so far supplied a total of $1.715 billion for both wholesale and retail purposes . The frequent injection of FX funds has ensured adequate liquidity in the market and drastically brought down the exchange rate of the dollar to the naira to N449 from N520 that it exchanged on February 20, when the apex bank commenced the intervention.
Presenting their position, analysts at The Economic Intelligence Unit of Access Bank stated that, having considered the recent positive developments, the MPC should retain MPR at 14 per cent, leaving the asymmetric corridor of +200 basis points and -500 basis unchanged. They also requested the MPC to retain the Cash Reserve Requirement (CRR) at 22.5 per cent and retain Liquidity Ratio at 30 per cent.
According to them, “The deceleration in inflation and slower rate of decline in GDP growth, make it very likely that the CBN will take a neutral stance with respect to the benchmark interest rate. Recent Communiqués by the MPC have implied that fiscal, rather than monetary expansion would be required to boost growth. The recent release of the Economic Recovery and Growth Plan (ERGP) signals that robust fiscal policy to complement monetary policy is underway.”
On the exchange rate, the Access Bank analysts anticipated “no change in the FX policy stance by the CBN as the monetary regulator evaluates whether the changes it enacted in February have been sufficient in improving liquidity.”
Similarly, analysts at FSDH Merchant Bank Ltd, expected the MPC to “hold rates at the current levels when it meets on March 20–21, 2017.”
“Although both the inflation rate and foreign exchange rate have shown signs of improvement in the last few weeks, a change in monetary policy might be too soon.
“We believe more time is required before a monetary policy change can be effective under the current situation. At its January 2017 meeting, the MPC maintained the monetary policy rate at 14 per cent, with the asymmetric corridor at +200 basis points and -700 basis points; retained the cash reserve requirement and liquidity ratio at 22.50 per cent and 30 per cent respectively,” they posited.
In fact, the FSDH analysts stated that, taking cognisance of the economic developments in the country and impact of the external developments on the economy, they expected the MPC to hold rates at the current levels. “We are also of the opinion that the Nigerian economy should move into positive territory in Q2 2017. This recovery is based on the improvements in crude oil production, oil price above US$50/b and growth in the agricultural sector. The planned FGN Savings Bond and the efforts of the Federal Government to reflate the economy will also support this argument,” they added.
Aligning with Access Bank and FSDH analysts, Chief Executive Officer, The CFG Advisory Ltd, Adetilewa Adebajo, stated that, with the advent of the ERGP and the slight easing of inflationary pressure, the expectation is that MPC should maintain status quo.
The Director, Union Capital Markets Ltd, Egie Akpata, who also didn’t see MPC making any change to any of its key rates, argued that, “The reversal in rising inflation for one month is not enough for them to cut rates.”
“Particularly as month-on-month inflation was higher in February than January. Besides, with US Fed hiking rates last week and in hiking mode, a rate cut will have negative impact on the Naira,” he added.
Likewise, Executive Director, Corporate Finance, BGL Capital Ltd, believed, “Given that the most important indicators for consideration for the MPC are inflation and exchange rates and the two facing moderation in recent times, a hike in the benchmark rate is not likely.”
Ademola therefore maintained that, “In other not to fuel inflation and also provide liquidity that can be used for foreign exchange speculations, the committee may not consider lowering the rate; hence the most likely action of the MPC is to retain the MPR.”