There are strong indications that the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) may keep the interest rate till the end of the general elections in 2019.
This is expected to be the MPC’s position at its rescheduled last meeting of the year in Abuja which begins today.
Analysts believe that rising demand for foreign exchange, leading to a consistent decline in the foreign reserves, and rising inflation rate are major justifications for an increase in policy rates.
At its last meeting in September 2018, the MPC maintained the Monetary Policy Rate (MPR) at 14 percent, with the asymmetric corridor at +200 and -500 basis points around the MPR; it retained the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) at 22.50% and 30%, respectively.
Looking at possible policy options open to the MPC, analysts at FSDH Merchant Bank are of the opinion that members of the MPC would vote to maintain interest rates at the current levels as the CBN continues to use the Open Market Operations (OMO) to manage liquidity in the banking industry in order to maintain price stability.
Significantly, analysts at Afrinvest said the MPC had become increasingly disposed to tightening rates in its last two meetings.
“We believe the committee will retain the benchmark rate at 14.0 percent to minimise the downside risks to growth and inflation,” they said.
A review of the global economy shows that global growth remains fairly strong, but trade restrictions may reduce global growth. This is according to the International Monetary Fund (IMF), which projects a global growth rate of 3.7 percent for 2018 and 2019.
The growth rate forecast is slightly lower than the growth rate projections the IMF released in July 2018, and despite the recent drop in the price of crude oil on the international market, the moderately strong global growth should sustain global crude oil prices around $70/b in the short-term.
Analysts at Afrinvest said the reduction in oil prices could put slight pressure on Nigeria’s current account balance, the external reserves and exchange rate.
Since the last MPC meeting, the reserves have reduced by $2.9 billion to $41.6 billion due to CBN’s intervention in currency markets in a bid to maintain exchange rate stability.
“We expect that the reserves will come under more pressure if oil prices remain below $70.00/b for a sustained period and investment outflows heighten ahead of elections,” Afrinvest analysts said.
However, many believe that an increase in the Fed Rate may further place additional demand pressure on foreign exchange in Nigeria and possibly increase capital flight from emerging markets. Thus, a rate cut in Nigeria is not appropriate under these situations.
According to analysts at FSDH, “The short-term forecast for the Nigerian economy shows that economic growth remains fragile. The IMF forecasts growth rates of 1.9 percent and 2.3 percent in 2018 and 2019, respectively. These growth rates are lower than the Nigerian population growth rate. Thus, the economy needs policy stimulus to record a growth rate that is inclusive.
“Nevertheless, monetary policy easing in the form of an interest rate cut may not stimulate growth. Appropriate fiscal measures and incentives that will improve the ease of doing business in Nigeria will lay strong foundation for sustainable growth.
“The Purchasing Managers’ Index (PMI) survey published by the CBN for the month of October 2018 expanded at a faster rate.”
FSDH Research attributes the expansion in the PMI to the increased economic activities that are usually associated with the last quarter of the year.
FSDH Research observed a consistent drawdown in the external reserves in order to maintain foreign exchange rate stability in Nigeria. The CBN increased the supply of foreign exchange at the Investors’ and Exporters’ Foreign Exchange Window and increased the yield at the OMO to dowse demand pressure at the foreign exchange market.
Consequently, the drawdown from the external reserves continued until November 2018. CBN remained the largest supplier of foreign exchange at the I & E window in the last three months.
FSDH Research notes that an attractive Nigerian Treasury Bill (NTB) yield around the current level of 16 percent may help to attract foreign portfolio investment and reduce capital flight.