Political uncertainty, inflation to decide MPC’s decision on interest rates –Analysts

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By Kayode Tokede and Olabode Jegede

Analysts have predicted that the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) might be maintaining its interest rate, among other economic parameters as inflation begins to slow down and pressure mounting towards the country’s 2019 general elections.

They noted that despite outcry for the lowering of interest rate, the MPC will likely keep things unchanged in order to further stabilize the economy. The MPC will be meeting today, Monday after holding the Monetary Policy Rate (MPR) at 14 per cent since July 2016, when inflation was over 18 per cent.

Although inflation rate had decelerated to slightly above 11 per cent, the MPC has stuck to its guns in maintain tight monetary policy.

However, with inflation trending upward to 11.23 per cent in August from 11.14 per cent, after 18 months consecutive slowdown and the country’s economy growing at a slower pace to 1.5 per cent in the first half of the year from 1.95 per cent in the first quarter, the CBN is in a dilemma between stimulating growth and battling inflation. The situation is further worsened by the ongoing election spending, which will increase money supply and cause inflation to further spiral.

“Status quo would be maintained. Inflation is rising, hence no time for downward review of rates. Unemployment is still high; oil prices and foreign exchange reserves are moderately down. All these reflect uncertainties and instability in the macro environment, hence no time to review the CBN mandatory rates downward. A wait-and-see attitude is likely to guide the decisions of the MPC next week,” maintained Prof. Joseph Ajibola, former President, Chartered Institute of Bankers of Nigeria (CIBN).

Another issue that would dominate the MPC meeting is the equity market, which had lost -14.97 per cent in the last six months, after posting 42. 3 per cent in 2017.

The underperformance of the bourse is traceable to foreign investors’ decision to dump emerging markets due to rising yields in the US market as they anticipate the Federal Reserve Bank to further hike interest rate in its next meeting. The Nigerian Stock Market had been dominated by bears, and it reversed the uptrend it had on Thursday as it shed -2.17 per cent to close at 35446.47 basis points. “I’m of the opinion that political pressure will influence their deliberations rather than economic logic.

Analysts at Cowry Assets Limited said the committee would likely play it safe and leave most of the monetary policy tools unchanged.

They explained that, “We expect the MPC to retain its benchmark interest rate, MPR, at 14per cent within the existing of corridor +two per cent and –five per cent.

“This is against the backdrop of 11.23per cent rise August inflation and the need to maintain positive real interest rates in order to countervail the argument for policy loosening amid slowing economic growth.”

Analysts at Cordros Capital said, “In our view, whilst fragile growth, depressed consumer spending, and the need to stimulate domestic investment present a substantial case for a rate cut, we think the case is negated by the rising liquidity profile, with attendant risk to foreign reserve and currency stability.

“On the flip side, while the renewed headline inflationary pressure combined with continued apprehension of foreign investors towards naira asset have increased the possibility of a rate hike, we believe that the decision would further impede the CBN’s recent effort at directing credit to the employment elastic sectors via the differentiated cash reserve requirement (DCRR) and corporate bonds (CB). “Overall, amid persistent capital flight and renewed inflationary worries, we expect the MPC to hold its policy parameters unchanged, while leveraging on the OMO channels to continue liquidity management,” the Lagos-based company explained.

However, the decision to maintain rates at the late MPC meeting was for the committee’s goal to consolidate on the gains recorded thus far on foreign exchange and the continued deceleration in headline inflation. The voting outcome of the last meeting – three members voted for a rate hike, from one in May – suggests that the committee is taking an increasingly hawkish stance amid swelling system liquidity, upside risks to inflation, and potential speculative tendencies on the naira.

In justifying its decision to maintain status quo, the committee stressed the need to protect the fragile growth vis-à-vis rate hike which could further weaken consumption level, raise borrowing costs to domestic investors, and trigger asset re-pricing by deposit money banks with the attendant negative impact further impeding credit to the private sector. With the balance of risk still tilting towards price and exchange rate stability, the MPC elected to employ the heterodox approach to encourage flow of credit to the real sector with a view to stimulating economic growth which remains on a knife edge. In that regard, the CBN proposed to participate in commercial papers issued by triple-a rated corporations and also incentivize banks to direct cheap and long-term financing to employment elastic sectors.

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