By Dipo Olowookere
Ahead of the Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN), which kicks off tomorrow, analysts at Lagos-based FSDH Research have said the apex bank may not tamper with the monetary policy rate (MPR) until its January 2019 meeting.
Though the company noted that rising demand for foreign exchange leading to a consistent decline in the foreign reserves, and rising inflation rate were major justifications for an increase in policy rates, it maintained that the CBN may continue to use the conduct of Open Market Operations (OMO) to manage the temporary liquidity in the financial system that may affect price stability.
Business Post recalls that at its meeting in September 2018, the MPC maintained the MPR at 14 percent, with the asymmetric corridor at +200 and -500 basis points around the MPR; the Cash Reserve Ratio (CRR) at 22.50 percent and the Liquidity Ratio (LR) at 30 percent.
According to FSDH, a review of the global economy shows that global growth remains fairly strong, but trade restrictions may reduce global growth. This is according to the International Monetary Fund (IMF), which projects a global growth rate of 3.7 percent for 2018 and 2019.
The growth rate forecast is slightly lower than the growth rate projections the IMF released in July 2018. Although FSDH Research notes that despite the recent drop in the price of crude oil on the international market, the moderately strong global growth should sustain global crude oil prices around $70/b in the short-term.
FSDH Research says it expects the Federal Open Market Committee (FOMC) of the US Federal Reserve to raise the Federal Funds Rate (Fed Rate) by 0.25 percent when the committee meets in December 2018.
The October 2018 US unemployment rate at 3.7 percent (lower than the target of 6.5 percent), inflation rate of 2.5 percent (higher than the target of 2 percent) and the growth of 3.5 percent in the economy all support arguments for an interest rate increase.
The investment firm said an increase in the Fed Rate may further place additional demand pressure on foreign exchange in Nigeria and possibly increase capital flight from emerging markets. Thus, a rate cut in Nigeria is not appropriate under these situations.
It said the short-term forecast for the Nigerian economy shows that economic growth remains fragile. The IMF forecasts growth rates of 1.9 percent and 2.3 percent in 2018 and 2019 respectively. These growth rates are lower than the Nigerian population growth rate. Thus, the economy needs policy stimulus to record a growth rate that is inclusive. Nevertheless, monetary policy easing in the form of an interest rate cut may not stimulate growth. Appropriate fiscal measures and incentives that will improve the ease of doing business in Nigeria will lay strong foundation for sustainable growth.
The Purchasing Managers’ Index (PMI) survey published by the CBN for the month of October 2018 expanded at a faster rate. FSDH Research attributes the expansion in the PMI to the increased economic activities that are usually associated with the last quarter of the year.
FSDH Research said it observed a consistent drawdown in the external reserves in order to maintain foreign exchange rate stability in Nigeria.
The CBN increased the supply of foreign exchange at the Investors’ and Exporters’ Foreign Exchange Window and increased the yield at the OMO to dowse demand pressure at the foreign exchange market.
Consequently, the drawdowns from the external reserves continued until November 2018. CBN remained the largest supplier of foreign exchange at the I & E window in the last three months.
FSDH Research noted that an attractive Nigerian Treasury Bill (NTB) yield around the current level of 16 percent may help to attract foreign portfolio investment and reduce capital flight.
Nevertheless, there is a need for deliberate fiscal measures and engagements that will promote non-oil exports that attract foreign investment into Nigeria and will guarantee foreign exchange stability.
The inflation rate increased to 11.28 percent in September 2018, the second increase since January 2017, principally due to the increase in the Food Index.
FSDH Research says it expects inflation rate to increase marginally to 11.34 percent in October and to end the year 2018 at 11.7 percent.
It said an increase in food prices, electioneering spending, and a possible increase in the minimum wage, are potential factors that will influence the direction of the inflation rate in the next three months.
Despite the expected rise in the inflation rate, it will be difficult for a hike in the interest rate to stem the rising inflation rate, as the cause of the rising inflation rate is not within the scope of monetary policy.
According to FSDH, the MPC may deal with the possible negative impact of an increase in the minimum wage at its January 2019 meeting. Thus a hold decision may be appropriate.
Data from the CBN shows that the key monetary aggregates in the country are below the target the CBN sets for the country. This development supports an argument for an expansionary policy to boost credit creation.
However, the current structural rigidities in the economy do not support strong credit growth. Therefore, unconventional policies are required to boost credit creation and business expansion to stimulate growth.
Measures that remove the risks inherent in the economy will encourage credit expansion and this will support sustainable growth.
Adedapo Adesanya