Rising Inflation, Forex Volatility are Key Issues as MPC Meets Tomorrow

Rising inflation, foreign exchange volatility, and stunted economic growth are key issues that will be discussed at the meeting of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), which begins tomorrow, analysts have said.

Tomorrow’s meeting of the MPC, the second this year, is coming at a time when oil prices are hovering around $43 per barrel, with inflation figures for February put at 11.4 per cent year-on-year – an increase from the 9.6 per cent it stood in January – and a yawning gap between the official and parallel foreign exchange market rates.

The MPC had at its last (January) meeting in Abuja, decided to retain the Monetary Policy Rate(MPR) at 11.0 per cent; cash reserve ratio (CRR) at 20.0 per cent; liquidity Ratio at 30 per cent; and the asymmetric corridor at +200 basis points and -700 basis points.

With the crisis in the international oil market cascading to the domestic arena which saw crude oil prices oscillating below or slightly above the $38 budget benchmark, the oil sector, still the mainstay and major income earner to the economy, has recorded a sub-optimal outing and the economy has therefore witnessed a gross domestic product (GDP) growth rate of 2.11 per cent in the fourth quarter of 2015, having slowed from the 2.8 per cent of the previous quarter.

The National Bureau of Statistics, which released the figures recently pointed out that the fourth quarter GDP was lower by 0.73 percentage points from growth recorded in the preceding quarter and also lower by 3.83 percentage points from growth recorded in the corresponding quarter of 2014.

In nominal terms, the value of the economy was put at N25.9 trillion for Q4 2015 and N94.1 trillion for the entire year 2015. The growth numbers came way below expectations and are the lowest since 2011 (post-GDP rebasing era).
Analysts have predicted weaker GDP growth rate for the first quarter 2016 and economic indices are pointing towards that direction.
As MPC meets again, analysts have their opinion as to which policy direction, the CBN should take.

A former chief economist of the African Finance Corporation (AFC) and chief executive officer of Nextnomics Advisory, Temitope Oshikoya, said, the MPC may hold the MPR at 11 per cent but added that the CBN would watch to see if the rising inflation rate would continue or not in March and April, to determine what next step to take with the MPR

“The MPC is cut between the hard rock and the deep sea.” Inflation in February was 11.4 per cent, which is higher than originally anticipated given the volatility in the parallel market during that month. The huge differential between the parallel and interbank rate in February likely resulted in significant one- off step increases in inflation. The MPC would be looking for signs as to whether or not this is a one-off temporary surge in inflation as the exchange rate differential has narrowed in March. Inflation numbers for March and April would provide the answers. This would likely make the MPC to hold on the MPR at 11 per cent at this meeting,” Oshikoya posited.

“The non-oil GDP numbers for Q4 2015 were not that bad, especially when compared sequentially with Q3 2015. While the oil sector and construction sub-sector posted poor growth rates, Manufacturing, agriculture, and key services sectors of education, trade, financial services, and telecom posted decent numbers, which suggest some semblance of economic stability in Q4. It will be interesting to see what Q1 2016 numbers would show for these non-oil sectors to confirm the relative economic stability or further slippages before the MPC decides on the next course of action on MPR,” he added.

Nevertheless, Oshikoya, who was also the director-general of the West African Monetary Institute, believed “the CBN is probably weighing options on the exchange rates in view of the fiscal constraints.”

“Given the preference of the fiscal authorities, however, the official exchange rate would likely stay the same at this MPC meeting. There may be some pronouncements relating to some limited flexibility on administrative controls both on the current and capital accounts sides,” he predicted.

Also, analysts at Dunn Loren Merrifield Asset Management Ltd led by its chief executive, Tola Odukoya, reasoned along the same line with Oshikoya, saying “we believe that rates are most likely to remain on hold as this is crucial to stimulating national output growth, albeit in the medium-to-long term.”

According to them, “we recommend that benchmark rate should remain on hold. Whilst we note that inflationary pressure is gaining momentum as expected mainly due to the lag effects of the exchange rate volatility seen in recent months and the resurgence of momentary factors which had earlier been subdued, we are inclined to highlight that current rate significantly exceeded expectations. This in our view challenges the committee’s resolve to maintain price stability given that the space for manoeuvre remains largely constrained.”

The analysts however, “recommend the adoption of policy measures to address exchange rate stability concerns” ahead of the MPC meeting. They suggested this, because they “believe this is crucial to easing some degree of inflationary pressures.”

“Whilst we are aware of the fact that mounting inflationary pressures might necessitate a decision to increase the monetary policy rate, we however uphold our view on the need to maintain lower interest rates within the economy. Therefore, we believe that rates are most likely to remain on hold as this is crucial to stimulating national output growth, the analysts concluded.
Aligning with the views of the experts in the foregoing, Executive Director, Corporate Finance Department of BGL Capital Ltd, Femi Ademola, was convinced that the MPC will not change the benchmark interest rate. He also believed the exchange rate will be maintained despite increased pressure to devalue the naira .
He explained: “Considering the current economic situation, the most important issues before the Committee are the foreign exchange volatilities and stunted economic growth.

“The decline in oil price had impacted the country’s exchange rate that most people are calling for a devaluation. However, the uptick in the oil price in recent days has reduced the pressure while the fact that the oil price is now close to the budget benchmark gives the necessary reprieve. So the MPC is likely to stick to the current exchange rate although there will be more calls than previous in support of devaluation.

“On the growth front, the best approach would be to lower interest rate in order to spur the needed liquidity for growth; however, the recent increase in inflation rate beyond the single digit means that there may be need to tighten the monetary policy to rein in inflation. In my opinion, in addition to foreign exchange volatilities , the most important cause of the high inflation is lack of infrastructure that is inhibiting production. The general price increase is not caused by excess demand rather it is caused by insufficient supply. Hence it would be more appropriate to fix the structural challenges and support it with monetary accommodation to spur growth. Due to the varying circumstances, I think the MPC will maintain the interest rate.”

Nevertheless, Head of Macroeconomic & Fixed Income, FBNQuest Ltd, a subsidiary of First Bank Nigeria Ltd, Gregory Krosten, who believed “higher inflation (above the policy rate) would generally warrant a rate hike, was quick to add that, “poor GDP figures for Q4 2015 suggest otherwise.”
“We would hope that we get some clarification of the inflation target/objective from the meeting since the present range is 6 per cent to 9 per cent,” he pointed out.

Just like the other analysts, Krosten reiterated that devaluation of the naira is not on the cards. “We do not expect a devaluation: official reserves have been flat over the past month and in any event the CBN and the majority on the MPC do not want it. There could perhaps be some discussion of the second window for FX.”

Former managing director and chief executive of Guinness Nigeria Plc, Seni Adetu, also commenting on the upcoming MPC meeting, said: “I hope that they really deliberate on the big monetary issues on the ground; which are beginning to adversely affect the same productive sector they are seeking to protect and the economy at large.

“The CBN has said repeatedly that they will not devalue the Naira; but I say to people, then we must take it that the Naira has devalued itself or are we exchanging at the same rate as we did a year ago? To me, this is by far the most pertinent economic issue in Nigeria today. One of the mandates of the MPC is obviously to “maintain Nigeria’s external reserves to safeguard the international value of the legal currency”.

Today, we face a situation of eroding external reserves and slipping legal currency; that is clearly a big challenge for the MPC to tackle. Interest rate under this climate of hyper-inflation is the other element I would imagine they will put on table. Reviewing how credit instruments such as bonds and treasury bills react is paramount. Let’s wait and see.”