CBN’s MPC Outcome: Analysts predict status quo
…Cost of funds’ volatility to persist
Analysts have predicted that the 11 member Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will retain key policy rates at the end of their meeting starting today and concluding tomorrow.
Meanwhile the scarcity of funds bedeviling the interbank money market is expected to persist this week with volatility in cost of funds as experienced last week.
The MPC at the end of its 112th meeting held in March maintained its tight monetary stance by retaining all the key policy rates citing headwinds in the domestic economy and the uncertainties in the global environment.
The Committee retained the Monetary Policy Rate (MPR) at 14 per cent; Liquidity Ratio at 30 per cent; Cash Reserve Ratio (CRR) at 22.5 per cent; Standing Deposit Facility (SDF) rate at 9 per cent; and Standing Lending Facility (SLF) rate at 16 per cent.
Dismissing the arguments for a loose monetary stance and lowering of policy rates, the Committee had then stated: “loosening would exacerbate inflationary pressures, worsen the exchange rate and further pull the real interest rate into negative territory. Since interest rates are sticky downwards, loosening may not necessarily transmit into lower retail lending rates.”
As the MPC members converge for the 113th meeting from today till tomorrow, Vanguard survey of financial analysts indicates general expectation that the Committee will maintain the status quo by retaining all the key policy rates.
“I don’t see them reducing the rates next week”, said Pabina Yinkere, Head, Research at Lagos based Vetiva Capital Management Limited. Speaking to Vanguard, he said: “Between the last meeting and now, there have been improvements in economic activities; the Purchasing Managers Index (PMI) has improved to above 50. We have seen inflation rate coming down slightly, though there are still concerns, especially considering that the month-on- month is still high.
“The development in the FX market, with the opening of the Investment & Exporters FX window, things have been looking brighter, that is also a positive.
Also government has come out with a plan, the ERGP (Economic Recovery and Growth Plan). So they will be watching the government to implement the plan. That is also a positive. But I think they will keep the rates. But by the next meeting they might began to consider easing, and in this meeting they might make some pronouncements that will provide forward guidance in that direction.”
Echoing the same views, research analyst at Ecobank Nigeria, Kunle Ezun, also stated: The balance of risks remains tilted towards price stability, as such; I expect CBN to hold MPR at 14.0% to accommodate current inflationary rate and expectations. The yields on naira denominated asset would have to be competitive to attract the much needed foreign inflows. Other monetary indices are expected to be held unchanged as well. Overall, a loosening monetary policy environment is rapidly developing, on the backdrop of a positive inflationary outlook and naira stability.”
Also, analysts at Financial Derivatives Company, in their preview of the MPC meeting, stated: Given that the ratio of hawks to doves is tilting towards the hawks, we anticipate that a status quo on monetary parameters will be sustained. This is because inflationary pressures persist in spite of the sustained decline in year- on-year inflation.”
However, analysts at Cowry Assets Management Limited, a Lagos based investment firm, differed slightly in their predictions.
While they projected that the MPC will retain the MPR, SLF rate and SDF rate, they however projected that the MPC will reduce the Cash Reserve Ratio (CRR) by 250 basis points to ease liquidity pressures on banks. They stated: “We anticipate that the MPC will retain the Monetary Policy Rate (MPR) at 14%. Our outlook for the MPR is based on the stance of the monetary authority to encourage foreign portfolio inflows by ensuring positive real returns for investors against the backdrop of relatively high inflation rate. In the same vein, we expect the liquidity ratio to be maintained at 30% while the Standing Lending Facility (SLFR) Rate and Standing Deposit Facility Rate (SDFR) retained at +2% and -5% respectively.
However, we expect the Cash Reserve Ratio requirement to be reviewed downwards by 250 basis points from 22.5% to 20% on account of persistent liquidity strain in the financial system, occasioned in part by crowding out effect of increased public sector borrowing to fund the fiscal deficit and which may have resulted in difficulty for lenders to fund foreign exchange demand of end users. Our expectation is corroborated by the increasing borrowing by banks at the SLF window observed at a monthly average of N316.68 billion in April compared to N249.74 in March and N224.57 billion in February.”
Cost of funds volatility to persist
Meanwhile the scarcity of funds prevailing in the interbank money market is expected to persist this week, as well as the concomitant volatility in cost of funds.
Last week the interbank money market liquidity position was worsened by treasury bills sale of N268 billion by the CBN, comprising N63 billion of secondary market (OMO) bills and N170 billion of primary market bills. This, combined with outflow to fund dollar purchases cancelled the effect of the inflow of N110 billion from matured bills, resulting to negative market liquidity position throughout the week.
This also caused wide gyration in cost of funds during the week. Interest rate on Colateralised loan (Open Buy Back, OBB) rose from 27.7 per cent at the beginning of the week to 62.5 per cent on Wednesday before falling to 23.3 per cent at the close of business on Friday. Similarly, interest rate on Overnight lending rose from 29.5 per cent at the beginning of the week to 66.8 per cent on Wednesday before falling to 26.1 per cent at the close of business on Friday.
Naira rises as external reserve maintain downward trend to $30.72bn
The naira recorded significant appreciation in the parallel market last week as the parallel market exchange rate dropped to N375 per dollar at the close of business on Friday from N385 per dollar the previous week. Market operators attributed the appreciation to decline in demand prompted by sustained dollar injection by CBN via weekly dollar sale of $40,000 to each of the 3,145 bureaux de change (BDC).
However the nation’s external reserve maintained its downward trend, falling further to $30.72 billion on May 17. On a week-on-week basis this represents decline of $200 billion, while it represents decline of $270 million when compared with the level of $30.99 billion on May 4th when the reserve commenced its downward movement.