Journalism in the service of society

MPC: Analysts expect CBN to keep olicy rates

AHEAD of the monetary policy committee meeting scheduled for the week, a slew of analysts is expecting the Central Bank of Nigeria to keep benchmark rates. Key macroeconomic indicators have seen a moderate improvement since the last meeting held in September 2021.

Due to the base effect, Nigeria’s macroeconomic data, inflation, gross domestic products and financial sector performance have seen moderate improvements against the reality of Nigerians living conditions.

Over the years, the CBN has remained largely pro-growth amidst a lack of fiscal authority growth propelling policy drive in the country. In their separate reports, analysts think the CBN would consider moderation in the headline inflation rate, gross domestic product growth while heightened pressure on the foreign exchange would top priority.

Healthy global oil prices would provide a support point for maintaining the status quo, according to analysts who also said there have been strong accretion into the external reserves – naira has lost steam in the foreign exchange market.

Monetary policy authority in the global space has given pointers on trimming their asset purchase programme due to rising inflation caused by a rebound in consumption expenditure and supply chain disruptions.

The US Federal Reserve on November 3 announced a decision to begin reducing the monthly pace of its net asset purchases by USD15.00 billion -USD10.00 billion for Treasury securities and USD5.00 billion for agency mortgage-backed securities- later this month and by USD30.00 billion beginning in December.

Taking note of the development, analysts at Cordros Capital said they expect the Fed to wind down its net asset purchases by June 2022 based on the current pace of reduction, paving the way for a possible rate hike in the second half.

Similarly, analysts said there are strong indications that the Bank of England might hike the interest rate by 15bps at its mid-December meeting in response to persisting above-target inflation.

Meanwhile, the Governing Council of the European Central Bank has guided that the pace of monthly asset purchases will moderate, albeit the Council is yet to provide full details on the tapering schedule.

In the parallel market, there has also been a partial recovery which appears to have slowed down in the just concluded week. The reason for naira gaining streaks was attributed to an improved FX supply by the apex bank.

Increased dollar inflow into the nation’s external reserves helped build the CBN buffer to contend with FX market dynamics – the activities of the currencies speculators had increased after the July meeting.

Analysts expect the accretion to the gross FX reserves to comfort the Committee to maintain its current stance as the CBN’s arsenal to defend the Naira is in a strong position

“We believe the Q3:2021 GDP performance, the further moderation in the headline inflation rate, and favourable external conditions such as the recent increase in Nigeria’s oil production quota to 1.67mbpd (from 1.65mbpd), the stabilisation of crude oil prices above $80.00/bbl.,

“…and the surprise extension of dovish monetary policy stance in the US would provide comfort for the CBN to maintain status-quo at next week’s Monetary Policy Committee (MPC) meeting”, Afrinvest said in its report.

Currency pressures at the parallel market are beginning to dissipate, a stark contrast to the last MPC meeting in September, as speculative activities, seems to be abating, according to Cordros Capital hinted.

However, analysts maintained that the CBN accommodative monetary stance is still required for output growth.

The CBN has stepped up its intervention in the Investors and Exporters Window, contributing an average of 36.4% to the total inflows between August and October above 31.4% in August-October 2020, following the substantial improvement in the gross FX reserves.

“We imagined that this would have improved business sentiments in the manufacturing sector combined with the recovery in demand”, analysts said in the note.

The Nigerian economy has recorded fourth consecutive quarterly growth with the last two quarters coming solid at 5.01% and 4.03% respectively. The feeling is that the CBN will maintain its current interventions to sustain the recovery of output growth, more so that the PMI readings remain sub-optimal.

“We believe the fragile recovery process would induce the Committee to favour maintaining its dovish stance”, analysts at Cordros Capital said. Given the limited option available to the CBN to reduce, retain or Increase, analysts at Atlass Portfolios Limited said they are of the opinion that more members of the committee will likely vote to retain the MPR.

It was noted that a reduction in the MPR will further reduce the cost of capital, facilitate new investments and more employment in the real sector, which will further on the foreign exchange market.

However, an increase in the MPR will help combat the high inflation rate but result in an increase in the cost of borrowing, hamper the economic gradual recovery and new investments needed, especially towards the manufacturing sector.

Also, Cordros expects MPC to keep MPR at 11.5% alongside other monetary policy parameters with a reduced dovish tone in the light of the growing shift to a hawkish monetary stance by global central bankers amidst risk factors that could reverse the downtrend in domestic inflation

Comments are closed.

Naija Times