Despite the rising calls by economic experts for lowering of benchmark interest rate, the Central Bank of Nigeria (CBN)-led Monetary Policy Committee (MPC) is expected to retain all rates as they are since July 26.
The MPC’s second meeting of the year holding today and tomorrow in Abuja, from all indication, won’t adjust the rates with the Monetary Policy Rate (MPR)- benchmark interest rat 14 per cent; Cash Reserve Ratio (CRR) at 22.5 per cent and Liquidity Ratio (LR) at 30 per cent and the Asymmetric corridor at +200 and -500 basis points around the MPR.
“We expect emphasis to be placed on the need to withstand a possible pass through inflation from rising global inflation as well as protect the economy and financial markets against rising downside risk of capital flow reversals,” analysts at Afrinvest West Africa said.
According to the investment and research firm, developments in the global economy and financial markets are likely to be viewed with mixed feelings by the MPC.
It said that much to the delight of policymakers in commodity exporting countries, oil prices hit $80.0/barrel mark last week – its highest since June 2014 – against the backdrop of the US exit from Iran’s nuclear deal as well as falling inventory levels and subsisting impact of OPEC’s production cut deal.
“Higher commodity prices is a boon to Nigeria’s external sector stability and fiscal balance, but it also comes with attendant risk of ballooning state’s petrol subsidy. On a balance of risks, we believe that external sector developments remain broadly favorable for Nigeria, supportive for economic growth and current monetary policy stance. Yet, the MPC will likely maintain its cautious view due to emerging downside risk of capital flow reversals,” they said.
Besides, economic data releases since the last MPC meeting have mirrored current positive outlook for the economy. The Purchasing Managers Index (PMI) released for April indicated an expansion in the economy (Manufacturing PMI stands at 56.9 while Non-Manufacturing PMI at 57.9) while dis-inflation trend extended to the 15th consecutive month in April.
Foreign exchange rate has already remained stable in all segments while External Reserves have stabilized around the $47.5 billion mark. “On the same day the MPC is starting, the Nigerian Bureau of Statistics -NBS is due to release first quarter 2018 Gross Domestic Product (GDP) numbers, which we expect to show continued expansion driven by low-base effect of Oil sector GDP as well as rebound in Trade and ICT,” they said.
Afrinvest said the positive development in consumer prices within the last 14 months has presented the CBN with an opportunity to begin to converge Monetary Policy Rate (MPR) with market interest rates which have since priced-in inflation expectation.
However, the decision will be delayed due to the ongoing capital flow reversal and asset prices volatility in emerging and frontier markets which is a downside risk to what has come to be the CBN’s prime policy anchor – Exchange Rate stability.
“The current capital flow reversal has been the strongest test for liquidity in the Investors’ and Exporters’ Window (I&E Window) so far; a test it is yet to pass with flying colors. The CBN has responded to the volatility in the Fixed Income market and increased demand for foreign exchange by tightening liquidity in the money market in the past two week,” Afrinvest said.