Galloping Inflation, Economic Recovery Top Agenda as MPC Meets

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•Analysts predict ‘hold’ on interest rate
•FG to redeem maturing $500m Eurobond

Obinna Chima

As the Monetary Policy Committee of the Central Bank of Nigeria (CBN) meets today to commence its two-day meeting, the deliberation is expected to be centered around how to tame inflationary pressure in the country and measures to support economic recovery will top the agenda.

However, analysts have ruled out the possibility of adjusting the benchmark Monetary Policy Rate (MPR) at the meeting, anticipating that the committee members will vote for a wait-and-see.
Also, in the new week, analysts have anticipated sustained pressure on the external reserves as federal government redeems its $500 million Eurobond that matures on January 28, 2021.

Owing to this, analysts at Cowry Assets Limited expects the naira to depreciate against the dollar at most market segments this week. Nigeria’s external reserves stood at $36.508 billion as of last Thursday.
The Consumer Price Index (CPI), which measures inflation, had increased to 15.75 per cent (year-on-year) in December 2020, compared to 14.48 per cent in November of the same year, according to figures released recently by the National Bureau of Statistics (NBS).

According to the CPI figures for December, on month-on-month basis, the headline index increased by 1.61 per cent.
The food inflation rose to 19.56 per cent in December 2020 compared to 18.30 per cent last November.

Nigeria’s real Gross Domestic Product (GDP) for the third quarter of 2020 had shown that the country had entered its second economic recession in five years. The GDP contracted for the second consecutive quarter by 3.62 per cent in the third quarter of 2020, compared to a growth of -6.10 per cent the previous quarter.

Owing to these, the MPC deliberation is expected to focus on how to return the economy to the path of growth.
“As the monetary authority convenes in the new week for the first MPC meeting in 2021, we expect the committee to further maintain status quo despite pressure on the exchange rate and general price level given the need to further stimulate Nigeria’s fragile economy out of recession.

“However, we note that the direction of interest rates may generally trend northwards at some point further afield in 2021 amid expected increase in borrowings by the fiscal authority to fund its budget deficit,” Cowry Assets added.

On its part, Greenwich Merchant Bank stated: “In our view, the MPC will maintain status-quo with MPR at 11.50 per cent, cautious of the uptrend in inflation rate and threats of the COVID-19 pandemic, now in its second wave, to the fragile macroeconomic space.”

In their projection, analysts at Cordros Securities Research said: “We believe consensus expectation for a hold decision if confirmed will engender positive market performance as investors cherry-pick stocks with attractive dividend yields amid negative real returns in the fixed income market.”

Also, the Financial Derivatives Company Limited, in its latest economic bulletin obtained at the weekend, stated that the MPC will this year be faced with a dilemma: keep interest rates low to bolster the economic recovery and ease the pressure on government financing costs or shift to a tightened monetary stance to curb inflation and attract capital inflows, staving off currency pressures and restoring external sector stability.

The Lagos-based firm explained that in 2020, the CBN justified its two 100 basis points rate cuts amid rising inflation with the need to boost the supply side of the real economy to bring inflation back under control.

However, it noted that structural rigidities such as inadequate public infrastructure, hard-currency shortages and rampant instability must be addressed before the supply side could moderate the price level. “Nonetheless, rather than the benchmark interest rate, it is the unorthodox policies of the CBN (minimum loan-to-deposit ratio of 65% and segregation of the OMO and T-bills market) that have driven down lending rates.

“Headline inflation is now forecast to average 16 per cent in 2021 and the CBN also admits that inflation above 12 per cent is growth retarding. Our expectation is for high inflation to compel the CBN to raise interest rates as soon as Nigeria escapes the current economic crisis and GDP growth turns positive.

“The CBN is also likely to shift its focus back to price stability in 2021 as multiple objectives (price and exchange rate stability, domestic industrialisation, credit growth) are currently undermining monetary policy effectiveness.

“Our base case is for an MPR hike of at least 200bps over the course of the year. The timing and pace of the hike will be a function of money supply growth, galloping inflation and exchange rate pressures,” the firm added.
The FDC stated that the battle to check inflation will likely compel the CBN to ease off on its current forex rationing strategy and allow a crawling peg.

This, it noted, will effectively allow the naira to fluctuate within a band – permitting a gradual and managed depreciation (probably monthly) of the currency rather than a large one-off devaluation, which could induce panic. “The crawling peg could be based on (Nigeria-US) inflation differential – currently at 14.35 per cent. In the medium term, the exchange rate is expected to be reflective of this inflation differential and depreciate by fairly the same magnitude.
“This will be transparent for investors and another step towards the eventual floating of the naira,” it added.