Economy
MPC Meeting: Experts Predict Rate Cut to 13%
Modupe Gbadeyanka
As the Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN) commences today, experts at FSDH Research are optimistic that the committee will likely support the reduction in the Monetary Policy Rate (MPR) by 50 basis points.
At its last meeting on May 20 and 21, 2019, the MPC retained the benchmark interest rate at 13.50 percent, and retained the asymmetric corridor of +200/-500 basis points around the MPR.
It also left both the Cash Reserve Ratio (CRR) at 22.5 percent; and the Liquidity Ratio (LR) at 30 percent.
Within the last few weeks, the CBN has issued two important directives to banks within geared towards stimulating lending to the real sector of the economy to boost economic activity.
In its report, FSDH Research said members of the MPC will likely vote to reduce the policy rates because an increase was not an option under the current economic situation in the country.
It said the short-term outlook of the inflation rate (which points to a declining trend, other things being equal), stability in the foreign exchange rate, and the drive of the Federal Government of Nigeria (FGN) and the CBN to stimulate growth in the economy all support a rate cut.
The investment firm said such a cut would add weight to the implementation of the CBN’s 5-year strategic plan.
“FSDH Research anticipates a 50 basis points reduction in the Monetary Policy Rate (MPR), as well as a possible adjustment to the asymmetric rates around the MPR,” the report said.
It noted that developments in the global economy also favour an interest rate cut in the short-term and expects the Federal Open Market Committee (FOMC) of the US Federal Reserve System to lower the Federal Funds Rate by 0.25 percent at its next meeting later this month.
The firm explained that this would aim to provide additional incentive for the global economy following signs of economic slowdown.
In the June 2019 edition of its Global Economic Prospects (GEP), the World Bank downgraded the global growth forecast for 2019 by 0.3% to 2.6 percent. The downward revision reflects weaker-than-expected international trade and investment during the first half of the year. The growth in sub-Saharan Africa was also significantly lower than expected. The 2019 growth forecast for Nigeria is now 2.1%, lower than the previous forecast of 2.2 percent.
According to FSDH Research, the short-term forecast indicates that the inflation rate in Nigeria may continue to trend downwards until October 2019. This is based on the assumptions that there will be no adjustments to the electricity tariff or the pump price of Premium Motor Spirit (PMS).
“Although we stress that there is a need for these prices to increase, the FGN may not be keen to an adjustment in the short-term.
“Should the increase take place, our projections show that it will shift the inflation curve by 2.5 percent. The impact of the implementation of the new National Minimum Wage on the inflation rate is minimal. Implications of the foregoing are that there may not be pressure on the MPC to raise the policy rate with a view to taming inflationary pressure.
“The CBN is already adopting moral suasion to encourage investment in agriculture to boost production and yields in an attempt to douse a spike in food prices which would place upward pressure on the inflation rate,” it said.
A major pressure point for the FGN at the moment is the high interest expenses relative to FGN revenue. Although the major cause of this problem is government’s low revenue, the low interest rate environment since January 2019 has helped the Debt Management Office (DMO) to raise cheaper debt for the government than before. Unless there is internal or external shock, CBN policies may continue to favour a low interest rate. This may also stimulate lending to non-oil sectors of the economy, provided there are complementary fiscal policies which will improve the business environment.
The negative impact of low growth in the global economy on the price and demand of crude oil may have a negative impact on the exchange rate.
“However, the current external reserve position at over $45billion may provide short-term stability for the exchange rate. In its July 2019 Short-Term Energy Outlook (STEO), the Energy Information Administration (EIA) revised downwards its forecast for Brent crude oil price to $66.51/b in 2019. The data shows that the price of crude oil fell from a peak of $77.06/b in May 2019 to $64.12/b in June.
“We also note that an increase in policy rate may not address the crude oil price. Intervention by the
Organization of the Petroleum Exporting Countries (OPEC) in the way of a production cut may also provide short-term stability for the crude oil price.
“While FSDH Research notes there are a number of structural challenges in the economy at the moment that can reduce the effectiveness of monetary policy, there are strong indications that the MPC members may vote to reduce the MPR to 13 percent.
“The market should not be surprised if the MPC also announces a reduction in the rate of the Standing Deposit Facility (SDF) of the banks with the CBN. It is possible that the MPC will maintain the Liquidity Ratio and CRR at the current level,” the report said.
By Adedapo Adesanya
The NASD Over-the-Counter (OTC) Securities Exchange rose by 0.40 per cent on Monday, July 13, buoyed by buying interest in 11 Plc, Central Securities Clearing System (CSCS) Plc and UBN Property Plc, which offset the profit-taking in Food Concepts Plc, the parent company of Chicken Republic.
11 Plc gained N20.69 to end at N227.64 per share compared with last Friday’s price of N206.95 per share, CSCS Plc grew by N1.83 to N91.48 per unit from N89.65 per unit, and UBN Property Plc added 1 Kobo to sell at N1.81 per share versus N1.80 per share.
On the flip side, Food Concepts Plc depreciated by 24 Kobo to close at N2.45 per unit, in contrast to the preceding session’s N2.69 per unit.
As a result, the market capitalisation increased by N9.2 billion to N2.587 trillion from N2.578 trillion, and the NASD Security Index (NSI) improved by 15.33 points to 4,311.67 points from 4,296.34 points.
Yesterday, the volume of securities traded by investors surged by 615.9 per cent to 9.1 million units from the previous 1.3 million units, and the value of securities rose by 997.1 per cent to N320.4 million from the preceding session’s N29.2 million, while the number of deals decreased by 12.5 per cent to 28 deals from last Friday’s 32 deals.
At the close of trades, Great Nigeria Insurance (GNI) Plc remained the most active stock by value on a year-to-date basis, with 3.4 billion units valued at N8.4 billion, followed by Infrastructure Credit Guarantee (Infracredit) Plc with 2.3 billion units worth N6.5 billion, and CSCS Plc with 73.9 million units exchanged for N5.2 billion.
GNI Plc also closed the session as the most traded stock by volume on a year-to-date basis, with 3.4 billion units sold for N8.4 billion, followed by Infracredit Plc with 2.3 billion units traded for N6.5 billion, and Resourcery Plc with 1.1 billion units transacted for N415.7 million.
By Adedapo Adesanya
The Naira maintained stability against the US Dollar in the Nigerian Autonomous Foreign Exchange Market (NAFEX) on Monday, July 13, at N1,379.65/$1.
However, it appreciated against the Pound Sterling in the official market by N2.44 to exchange at N1,848.18/£1 compared with the previous rate of N1,850.62/£1, and lost 73 Kobo against the Euro to sell at N1,576.39/€1 versus last Friday’s N1,575.66/€1.
At the GTBank fore counter, the Naira declined by N2 to settle at N1,388/$1, in contrast to the previous session’s rate of N1,386/$1, and at the black market, it traded flat at N1,400/$1.
Market analysts expect the Naira to trade within a relatively stable range, supported by sustained FX inflows and a continued market intervention by the Central Bank of Nigeria (CBN), although persistent underlying FX demand is likely to keep depreciation pressures elevated.
According to Monday’s trading data, interbank FX turnover surged by 21.14 per cent to $86.136 million from $71.044 million at the previous trading session on Friday.
However, interbank deal counts declined to 85 from 87 on Monday, reflecting the absence of pressure from US Dollar payments against local units. Last week, total foreign exchange inflows amounted to $0.97 billion, according to a Coronation Merchant Bank research report.
Analysts reported that foreign portfolio investors (FPIs) remained the largest source of inflows, contributing 30.29% or $0.29 billion, closely followed by Exporters and Importers at 30.14 per cent.
Non-bank corporates accounted for 26.49 per cent or $0.26 billion, while the CBN contributed 6.93 per cent or $0.07 billion. Other sources made up the remaining 5.4 per cent of total inflows.
In the cryptocurrency market, major coins came under pressure following heightened expectations for a Federal Reserve interest-rate increase as soon as July, just ahead of key US inflation data and congressional testimony from Chairman Kevin Warsh came into focus.
Bitcoin (BTC) fell by 0.2 per cent to $62,627.03, Solana (SOL) dipped by 1.5 per cent to $75.18, TRON (TRX) depreciated by 0.2 per cent to $0.3248, Ripple (XRP) slumped by 0.6 per cent to $1.06, and Cardano (ADA) lost 0.6 per cent to close at $0.1589.
On the flip side, Ethereum (ETH) appreciated by 0.5 per cent to $1,784.26, Dogecoin (DOGE) grew by 0.2 per cent to $0.073, and Binance Coin (BNB) jumped by 0.2 per cent to $569.23, while the US Dollar Tether (USDT) and the US Dollar Coin (USDC) traded flat at $1.00 apiece.
By Adedapo Adesanya
Brent jumped to $83 per barrel on Monday after the United States announced a fresh blockade that reignited concerns over energy shipments through the Strait of Hormuz.
The international crude benchmark soared by $7.29 or 9.59 per cent to $83.30 per barrel, while the US West Texas Intermediate (WTI) crude gained $6.73 or 9.42 per cent to trade at $78.14 a barrel.
US President Donald Trump announced that he would reinstate a blockade on Iran, forcing traders to once again price in the risk of prolonged disruption to energy flows through the Strait of Hormuz. The blockade, due to begin on Tuesday, will cover Iran’s entire coastline, ports and oil terminals, as well as all vessels regardless of flag.
The US President also said vessels receiving protection while transiting Hormuz would reimburse the country through a 20 per cent charge on cargoes, Reuters reported.
President Trump’s idea would mean that a 20 per cent fee on a supertanker that carries about 2 million barrels of crude at $80 per barrel would be equivalent to around $32 million, or an additional cost of $16 per barrel.
“This is significantly higher than the $1/bbl toll for which Iran has been pushing,” ING’s strategists said.
The proposal was also criticised by the International Maritime Organisation (IMO) because international law does not provide for mandatory transit fees through straits used for international navigation. Energy companies have also rejected similar proposals previously advanced by Tehran, arguing that freedom of navigation remains a cornerstone of global maritime trade.
Iran’s top joint military command had earlier said it would not allow the US to intervene in the management of the strait, and any attempt by the US to transit without its authorisation would be confronted.
Analysts now expect countries to work on ways to permanently bypass the Strait of Hormuz. Goldman Sachs estimated that expanding pipeline capacity in the Middle East could shield more than 60 per cent of pre-war Gulf oil exports from any future Hormuz disruptions by the end of 2028.
The bank’s base-case forecast assumes pipeline capacity bypassing Hormuz will rise by 3.8 million barrels per day by end-2027 and 7.3 million barrels per day cumulatively by end-2028, taking total effective bypass capacity to more than 14 million barrels per day by end-2028.
The Organisation of the Petroleum Exporting Countries (OPEC) has trimmed its 2026 global oil demand growth forecast for the third straight month, even as crude production rebounds across the Gulf and tanker traffic slowly returns to the Strait of Hormuz.
In its monthly oil market report released Monday, OPEC lowered expected oil demand growth this year to 780,000 barrels per day, down another 190,000 barrels per day from last month’s forecast. The producer group still expects stronger consumption than many other forecasters, including the International Energy Agency, and even raised its demand growth estimate for 2027 by 210,000 barrels per day to 1.94 million barrels per day.
