Any Rate Cut by MPC Will Lead to Negative Real Yield—FSDH

September 21, 2017
MPC Meeting CBN

By Modupe Gbadeyanka

Analysts at FSDH Research have warned that any attempt by the Monetary Policy Committee (MPC) to cut rate at its meeting next week will lead to a negative real yield, with a possible significant capital flight from Nigeria by foreign investors.

FSDH, in its latest report obtained by Business Post, said it expects the committee to still hold the rate at 14 percent.

Members of the MPC will meet next week and observers are keenly awaiting outcome of the meeting.

FSDH noted that the value of the Naira recorded a mixed performance but show relative stability since the last MPC meeting in July 2017.

The value of the Naira depreciated at the official market, while it closed unchanged at the parallel market.

The inter-bank market rate depreciated marginally by 0.07 percent to N305.95/$ on September 15, 2017 from N305.75/ $ on July 25, 2017.

The parallel market closed unchanged at N367/ $ on September 15, 2017 same as at July 25, 2017.

It said the premium between the inter-bank and parallel markets averaged about N61 after the last MPC meeting in July 2017 and September 15, 2017 from an average of N66 during the period between the MPC Meeting of May and July 2017 meeting.

“A rate cut will lead to a negative real yield, with a possible significant capital flight from Nigeria by foreign investors. Thus, a hold decision is appropriate,” the report said.

FSDH also noted that the yields on NTBs decreased in August 2017, compared with July 2017. At the NTBs auction, average yield on the 91-day was down at 13.82 percent in the month of August compared with 13.93 percent recorded in July 2017.

The average 182-Day NTB stood at 19.02 percent in August 2017, down from 19.11 percent in July 2017. The average 364-Day NTB yield also closed lower at 22.73 percent in August 2017, from 22.80 percent in July 2017.

“The yields on the FGN Bonds that we monitored closed higher in August 2017 over the preceding month. The average yield on the 16 percent FGN June 2019 increased to 16.84 percent in August from 16.62 percent in July.

The 16.39 percent FGN Jan 2022 closed at 16.33 percent in August 2017, marginally higher than 16.13 percent in July 2017; the 10 percent FGN Jan 2030 also closed at 16.43 percent in August 2017, higher than 16.12 percent in July 2017.

“We expect the yields on the fixed income securities to trend downward going forward. This is because of FX stability, plans of the FGN to refinance part of the local debt into foreign debt and the positive GDP growth rate expected going forward,” it said.

The report also said the monetary aggregates (narrow money and broad money) as at July 2017 show that the annualised growth rate in money supply is below the target that the CBN sets for the year 2017.

The broad money supply (M2) decreased by 5.08 percent to N22.20trn in July 2017 from N23.39trn in December 2016. This is lower than the CBN’s growth rate target of 10.29 percent for the year 2017.

The net domestic credit increased marginally by 1.92 percent to N27.16trn in July 2017 from N26.65trn in December 2016.

The annualised growth rate in the net domestic credit in July 2017 was 3.29 percent, below the target growth rate of 17.93 percent for 2017.

The net domestic credit to the Federal Government increased by 6.88 percent to N4.99trn in July 2017 from N4.67trn in December 2016. The net domestic credit to private sector also increased marginally by 0.87 percent to N22.17trn in July 2017 from N21.98trn in December 2016.

The CBN has maintained tight monetary policy to curb high inflation rate and ensure FX stability.

“Looking at the developments both in the domestic and international markets, a hold in rates at this meeting will be appropriate in order to sustain the current growth rate in the economy. However, the MPC may adjust the asymmetric corridor around the MPR to signify easing.

“Meanwhile, fiscal measures in the forms of tax relief and tariff adjustment are required to boost economic activities,” the report said.


Modupe Gbadeyanka

Modupe Gbadeyanka is a fast-rising journalist with Business Post Nigeria. Her passion for journalism is amazing. She is willing to learn more with a view to becoming one of the best pen-pushers in Nigeria. Her role models are the duo of CNN's Richard Quest and Christiane Amanpour.

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