By Ayobami Adedinni
As the Monetary Policy Committee (MPC) of the Central Bank of Nigeria meets today and tomorrow, experts at the Financial Derivatives Company (FDC) have predicted the Committee maintaining the status quo.
They said a rate hold might be appropriate, given the prospects of reduced foreign exchange earnings from lower oil production and that tight monetary policy stance will continue to attract foreign investors.
It said the most likely outcome is a split decision and a compromise around the maintenance of the status quo with fringe adjustments to the CRR and the width of the asymmetric corridor.
According to the report, this may be informed by the fact that South Africa and Nigeria both emerged from a recession at the same time and South Africa maintained the status quo because of the upside risks to inflation, in spite of the country’s weak economic performance.
It stated that given the developments in the domestic and international markets, the most likely outcomes are that the Monetary Policy Ratio (MPR) will hold at 14 per cent, Cash Reserve Ratio (CRR) at 22.5 per cent and Liquidity ratio at 30 per cent.
Speaking on the Gross Domestic Products (GDP) moving into positive territory , it said the challenge is that growth is fragile because excluding the oil and agriculture sectors, second-quarter growth was negative at 0.22 per cent.
It said, “Given this context, there is increasing pressure on the central bank to adopt a pro-cyclical policy in order to compliment the fiscal stimulus and sustain the upward trend in economic growth. Therefore, this is not a broad-based and impactful recovery.
“Broad money supply (M2) declined by 5.08 per cent to N22.20trillion in July 2017 from N23.39trillion in December 2016. This is far below the CBN’s money supply growth target of 10.29 per cent.
“The contraction in money supply aggregates, combined with the sterilization of significant portions of money by way of cash reserve ratio deposits, has reduced liquidity and aggregate demand in the economy. There is a positive correlation between money supply and inflation.
“If with a contraction in M2, inflation reached 16.01 per cent, the hawks will argue that with monetary accommodation, inflation will spike to hyperinflation territory, maybe above 20 per cent,” it said.
According to the report, Nigeria’s headline inflation fell for the seventh consecutive month in August to 16.01 per cent after reaching a high of 18.7 per cent in January.
“The main contributor of inflation is the food inflation sub-index, which declined to 20.25% in August from a record peak of 20.28% in July. Food inflation remains high because traders are smuggling food products to neighbouring countries, such as Benin Republic, Cameroon, Chad and Niger.
“The weaker naira relative to the CFA franc is an incentive for traders to sell their products across the border rather than the domestic market. If the naira weakens further due to increased liquidity, high food inflation will remain an albatross for policymakers,” the report by FDC added.
The level of gross external reserves continues to increase on higher oil production and prices. Currently at $31.88billion, the reserves level has increased by 3.78per cent ($1.23bn) since the last MPC meeting. According to a senior CBN official, the level of external reserves has increased to $33bn. However, official data lags the pronouncement