The Monetary Policy Committee (MPC) held its sixth and final meeting for 2017 last week. In line with consensus expectation, MPC members voted for the retention of policy rates at current levels. The committee stressed the need to consolidate on the gains in external balance and domestic price stability. But financial experts predict a possibility of the MPC, led by the Central Bank of Nigeria (CBN), lowering benchmark interest rate from 14 per cent in 2018 when more growths are achieved in key segments of the economy, COLLINS NWEZE reports.
All eyes are on the Central Bank of Nigeria (CBN) to cut interest rate and give real sector operators a greater opportunity to stay profitable.
But if feelers from economic experts are anything to go by, that will not happen until the later part of next year. Calls for a reduction in the interest rate were loud during the Monetary Policy Committee (MPC) meeting in Abuja last week.
The CBN-led MPC meeting held on November 20 and 21. It was the sixth and final meeting by the committee for the year. The meeting was held against the backdrop of moves by the apex bank to begin the phasing out of the accommodative monetary policy put in place to sustain growth – rising commodity prices and improving domestic macroeconomic conditions anchored by recovery in external sector variables.
Expectedly, the MPC retained the MPR at 14 per cent; Cash Reserve Ratio (CRR) at 22.5 per cent and Liquidity Ratio (LR) at 30 per cent as well as the retention of the Asymmetric corridor at +200 and -500 basis points around the MPR.
Despite the noticeable easing of external sector pressures and improving growth prospect, analysts said the MPC retained the rates, owing to the fragility of the economic recovery and disappointing inflation numbers witnessed so far in September.
Head of the Currencies Unit at Ecobank Nigeria, Olakunle Ezun listed the three posers that come to mind anytime the MPC meets. They are: “Will the MPC hold the rate, raise the rate or cut the rate?
Describing the questions as critical, Ezun ruled out raising rate option, he said: “I think they will keep all rates unchanged.”
Ezun said the MPC held the rates because the National Bureau of Statistics (NBS) third quarter Gross Domestic Product (GDP) growth was too marginal to effect a change.
He said: “The drop in inflation is also not enough to lead to rate cut. The economy is still very fragile because enough money has not been spent on capital expenditure to trigger growth. If the economy is still fragile and growth is still weak, while in a hurry to cut rate.”
According to him, rate cut may be a good idea in the first quarter of next year when the growth in the economy would have been so massive to trigger such a decision by the MPC.
Also speaking, the Managing Director of Afrinvest West Africa Limited, Ike Chioke, said that whilst the recent rally in oil prices is expected to have a positive knock-on impact on fiscal and external sector balance of oil exporting countries including Nigeria, the increasing odds of monetary policy tightening by systemic central banks – the Bank of England (BOE), Bank of Japan (BoJ), European Central Bank (ECB) and the U.S. Fed – constitute an headwind to asset prices and macroeconomic stability in emerging and frontier markets made it difficult for the MPC to cut rates.
He said the CBN has recorded remarkable gains since the start of the year in forex stability – one of its major policy objectives and indeed the prime monetary policy anchor in the last three years.
He said that the rebound in oil exports in September last year, which triggered a positive impact on current account and external reserves, marked a turning point in macroeconomic stability and the pro-market moves made by the CBN. The introduction of the Investors and Exports Window in April has also consolidated the gains in the forex stability with the Naira appreciating in all segments of the market since the last meeting.
Chioke said that despite the broadly consensus view on the MPC outcome, there were calls from several quarters in the run-up to the meeting for monetary easing via reduction in benchmark rate to support the nascent and slow-pace of economic recovery.
In his remarks, CBN Governor Godwin Emefiele acknowledged the justification for easing – weak economic growth as against supportive external sector variables – forex rates convergence, improving capital inflows, steady oil prices and growth in reserves.
Yet, the committee overwhelmingly voted to retain policy rates in consideration of the downside risks of a premature easing cycle.
Although the MPC reiterated its tightening objective policy, the bullish run in the fixed income market has continued unabated, driven by decline in primary market issuance rates – T-bills, OMO and bond auctions – as well as fiscal strategy to reduce domestic debt issuances in favour of external debts.
GDP growth continues
On November 20, the NBS released the September GDP report which expectedly, showed an expansion in the economy for the second consecutive quarter. Total output in the economy grew 1.4 per cent year-on-year in September 2017, below Bloomberg Consensus and Afrinvest Research projections of 1.5 per cent and 2.7 per cent respectively, but above revised second quarter 2017 GDP estimate of 0.7 per cent (from 0.5 per cent reported earlier).
Underlying the acceleration in growth in the Quarter is continued expansion in the oil sector, which grew 25.9 per cent year-on-year to offset the 0.8 per cent contraction in non-oil sector. The oil sector expanded for the second time this year, gaining momentum from a soft 3.5 per cent year-on-year expansion in second quarter, due to improvement in oil production volume to 2.0mbpd from a low base of 1.6mbpd in the third quarter of last year.
Interest rate cut in likely
next year
For the first time in 16 months, the CBN chief executive on November 10, hinted on the possibility of lowering the interest rate in 1998.
Emefiele spoke at the 2017 Annual Bankers’ Dinner, organised by the Chartered Institute of Bankers of Nigeria (CIBN) in Lagos, on the positive economic outlook expected in 2018.
He explained that the monetary policy stance could change early next year when the underlying fundamental such as drop in inflation becomes more supportive. The CBN governor did not however say how low the interest rate could drop.
The CBN had at the peak of rising inflation, embarked on a cycle of tightening measures with the Monetary Policy Rate (MPR) – the benchmark interest rate hiked in July 2016 from 12 per cent to 14 per cent.
“If the pace of disinflation becomes adequate and we see inflation at predicted levels, I am very optimistic that Monetary Policy Committee (MPC) may begin to see strong justification for an easing of monetary policy, which may further accelerate the recovery process,” Emefiele said.
Emefiele said that from a peak of 18.72 per cent in January 2017, the headline inflation recorded eight straight months of disinflation, with the rate declining to 15.98 in September. He was speaking on the theme: “Policy options for sustaining Nigeria’s economic upturn”.
During this period, core inflation and imported food inflation, similarly fell from 17.90 per cent and 20.95 per cent, respectively, to 12.12 per cent and 14.83 per cent.
He said the country has also seen a significant appreciation of the naira from over N500/$1 to about N360/$1.
“In addition, we have seen stability in the rate for over six months now. I am glad to note that the exchange rate is not only stable, it is also converging across various windows and segments of the market,” Emefiele said.
The MPC intervention
The MPC met against the backdrop of a relatively optimistic global economic outlook. The committee reviewed key developments in the global and domestic economies in the past 10 months of this year and assessed the risks to price and financial stability in the short-to-medium-term as well as the outlook for the first half of next year.
The committee also noted the continuous positive outlook based on the Manufacturing Purchasing Managers Index (PMI), which stood at 55.0 index points last month, indicating expansion in the manufacturing sector for the seventh consecutive month.
Eleven of the 16 sub-sectors reported growth in the period under review. Also, the composite PMI for the non-manufacturing sector stood at 55.3 index points in October 2017, indicating growth for the sixth consecutive month.
The committee hopes that, while the economic recovery appears to remain fragile, a tenacious implementation of the 2017 budget and quick passage of the 2018 budget would boost aggregate demand and confidence in the economy.
Foreign reserves pick up
The committee noted the continuing improvement in the level of external reserves and the equities segment of the capital market. External reserves grew to $34.9 billion at the close of business on November 16, 2017. Similarly, the All-Share Index (ASI) rose by 3.38 per cent from 35,504.62 on August 31, 2017 to 36,703.58 on November 17. Market Capitalisation (MC) improved by 4.35 per cent to N12.77 trillion from N12.24 trillion during the same period. Relative to end-December 2016, capital market indices rose by 36.57 and 38.10 per cent, respectively, indicating rising investor confidence, due to improvements in foreign exchange supply.
However, the total foreign exchange (forex) inflow through the CBN declined by 6.61 per cent in October 2017, compared with the previous month and attributable to the decline in crude oil and gas receipts as well as revenues from petroleum profit tax (PPT) and royalty payments. Total outflows, however, increased by 18.77 per cent during the same period, as a result of interbank sales, direct payments and Joint Venture Company (JVC) calls.
The committee noted the gradual convergence between the rates at the Bureau de Change (BDC) and the Nigeria Autonomous Foreign Exchange (NAFEX) market segments, as well as the stability of the exchange rate at the inter-bank segments of the forex market during the review period.
The MPC viewed with satisfaction, the growing patronage at the Investors’ and Exporters’ (I&E) window of the foreign exchange market and attributed the development to increased confidence by foreign investors and the preference of Nigerian investors’ and exporters’ for the window compared with all other windows.
The MPC noted that the I&E window had increased liquidity and boosted confidence in the market with over $18.70 billion in transactions since its introduction in April 2017.
Forecasts of key macroeconomic variables indicate a positive outlook for the economy up to first quarter of 2018. This is predicated on continued implementation of the 2017 budget into early 2018, anticipated improvements in government revenue from the implementation of the Voluntary Asset and Income Declaration Scheme (VAIDS) as well as favourable crude oil prices.