MPC: Mixed domestic signals justify maintaining status quo —Analysts

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A mix of foreign exchange stability, inflation expectations, capital spending, growth acceleration among other positive impacts of past policies will make the Monetary Policy Committee (MPC) to leave policy rates unchanged, analysts say.

The MPC of the Central Bank of Nigeria will be holding its last meeting for the year on the 20th and 21st of November 2017  (today and tomorrow). The committee will review among others, the current state of the global economy, as well as changes in key macroeconomic indicators in the local economy in order to determine policy directions for key monetary variables in the near term.

Analysts at an investment advisory and research firm, Meristem, anticipate the committee will among other recent events, consider the impact of capital spending in the proposed 2018 Appropriation Bill, the recent political upheavals in Saudi Arabia and its impact on the price of crude oil, and the impact of the recent downgrade of the country’s sovereign rating by Moody’s on fiscal policy in 2018.

“While we observe the improvements in some economic indicators such as external reserves, FX liquidity, inflation rate among others, the economy still remains in a fragile state of recovery. A change in the current stance may therefore distort the gains achieved thus far. We therefore expect the MPC to maintain rate at the current level.

“However, we do not expect the rate cut next week as Headline Inflation is still far off from the target range of 7 to 9 per cent and above the benchmark policy rate (14.0 per cent). Hence, we expect the conclusion of the sixth MPC meeting would be to; retain the MPR at 14.0 per cent; retain the CRR at 22.5 per cent; retain the liquidity ratio at 30.0 per cent and retain the Asymmetric corridor at +200 and -500 basis points around the MPR.”

According to Meristem, the CBN has recorded remarkable gains since the start of the year in FX stability – one of its major policy objectives and indeed the prime monetary policy anchor in the last 3 years.

Although the rebound in oil exports in Q3:2016, which has had a positive impact on current account and external reserves, marked a turning point in macro-economic stability, pro-market moves made by the CBN, particularly the opening of the Investors and Exports Window in April, has consolidated the gains in the FX stability with the Naira appreciating in all segments of the market since the last meeting.

Analysts from Cowry Assets Management Limited, just like their counterpart at Financial Derivatives Company Limited believe that the MPC will retain policy rates.

“We opine that the MPC will retain the benchmark interest rate at 14 per cent despite sustained moderation in inflation rate, amid falling food prices; increase in global crude oil prices with attendant boost in external reserves, convergence in foreign exchange rate and a return to expected sustained economic growth,” the company said in a note to clients.

It noted that the opinion is based on expected public sector and household spending in coming months.

However, Meristem belives that the same could not be said of the other policy objective – price stability. With the impact of high-base effect on Consumer Price Index (CPI) growth now exhausted, sticky inflation results have left near-term Inflation outlook unchanged since the last meeting.

It further revealed that the slow pace of the recovery coupled with the feedback effect of high interest rate environment on debt sustainability vis-à-vis favourable external sector variables are considerations dovish members of the committee will highlight to justify a rate cut.

“We, however, note that near term outlook still favours easing as guided by the CBN Governor in recent comments. Investors are already pricing this expectation into valuation of debt securities, with average bond yield down 110bps since January 2017. We believe there is still scope for more rally in the Fixed Income market as we expect the CBN to cut its benchmark rate in Q2:2018.

“We believe the need to maintain an attractive yield environment to abate the skepticism of foreign investors should skew the decision of the committee towards holding the MPR and other policy rates constant. In light of this, we believe the high yield environment would remain sustained for the rest of the year,” the committee stated.

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