Analysts Rule Out Interest Rate Cut as MPC Meets

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Obinna Chima

Financial market analysts have ruled out the possibility of a cut in interest rate by the Central Bank of Nigeria (CBN) whose Monetary Policy Committee (MPC) commences its 271st meeting today in Abuja.

The CBN had postponed the first meeting for the year, which was earlier scheduled for last Monday and Tuesday, to today and tomorrow.
At the last meeting held last November, the committee had left all the monetary policy tools unchanged. For instance, it left the benchmark Monetary Policy Rate (MPR) unchanged at 13.5 per cent and held other parameters constant.

It also retained the asymmetric corridor at +200/-500 basis points around the MPR. The Cash Reserve Requirements (CRR) and Liquidity Ratio remained at 22.5 per cent and 30 per cent respectively.

But commenting on their expectations from the two-day meeting, analysts at Nova Merchant Bank Limited anticipated that at the end of the meeting, the committee will keep all the monetary policy tools unchanged.

“With foreign investors still active at open market operations (OMO) auctions, expected inflationary pressure largely driven by supply side factors and positive impacts of the loan-to-deposit ratio (LDR) limit on private sector credits (at least for now), we believe the odds largely favour a hold of monetary policy parameters, especially the MPR at the end of the MPC meeting on Friday.

“However, recent events have suggested the CBN concerns for elevated liquidity in the system. Our channel checks revealed the apex bank has been adopting unusual CRR for banks with higher than usual bids at OMO and forex auctions.

“Accordingly, we do not rule out institutionalisation of a higher CRR sometime in the year to combat rising system liquidity. We also expect continued differentiated CRR depending on banks’ loan to deposit ratio compared to the regulatory limit of 65 per cent,” the analysts stated.
On his part, the Group Executive Director at Cordros Capital Limited, Mr. Femi Ademola, predicted that the MPC will leave rates unchanged.

“The CBN has been has been able to hold rates down. So, it is looking like they will keep the MPR stable. The only challenge will be exchange rate issue, which I think for now is not out of their (CBN’s) hands yet. So, the way it is now, it appears they are going to keep it unchanged,” he said.
Also, the Head of Research, Agusto & Co, Mr. Jimi Ogbobine, predicted that the benchmark interest rate would be maintained.

“This is the first meeting for the decade. Even though the Nigerian Electricity Regulatory Commission (NERC) has said they intend to increase tariff, which is likely going to contribute to inflationary pressure, we must remember that the focus of the central bank is to drive economic growth through credit growth and we can see what has happened in the lending market,” Ogbobine added.

However, the Nova Merchant Bank analysts, in a separate report on the economic outlook for 2020, anticipated that the Nigerian economy would grow by 2.4 per cent this year.
The report stated that central to its forecast was a possible breach of the Organisation of Petroleum Exporting Countries (OPEC) production cap (with estimated crude oil production of 2.05mbps, including condensates) and receding herdsmen and farmers conflict amidst ongoing government intervention in crop production. This, it expected, would support growth in the agriculture sector.

“For the services sector, we believe ICT will continue to provide the necessary support for growth, with investment in fintech and customer acquisition in same expected to support much stronger growth in the sector in 2020.

“We believe there is a strong risk of further hemorrhaging in the gross external reserves, possibly to as low as $33.1 billion at the end of December 2020 (excluding possible foreign borrowings). Our expectation is based on our modelled oil and non-oil inflow, which suggests that the apex bank will run on lower flows over 2020, with average monthly inflow of $3.9 billion (2019 average: $4.6 billion). However, despite our expectation of cumulative lower CBN intervention over 2020 (with monthly average of $4.3 billion), the lower inflow informed monthly average reserve drawdown of $371 million (2019 average: $424 million) over 2020.

“Notwithstanding our fundamental based purchasing power parity suggesting 12 per cent overvaluation of the naira, we expect the CBN to keep the naira-dollar rate stable over 2020 between the range of N363-368/$,” the report added.