Financial analysts have projected that the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is likely to hold rates at the current position when it meets this week.
They also said that although there are justifications to ease the policy, the view of the MPC members that fiscal injections and rising rates in the international market would have adverse impacts on price stability in Nigeria may not allow the MPC to ease policy. Analysts were of the view that weak economic and credit growth in Nigeria do not justify rates hike.
The MPC of the CBN in expected to hold the third meeting in 2018 on Monday, 23 and Tuesday, 24 July 2018.
It would be recalled that at its meeting in May 2018, the MPC maintained the Monetary Policy Rate (MPR) at 14 per cent, with the asymmetric corridor at +200 and -500 basis points around the MPR; it retained the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) at 22.50 per cent and 30 per cent respectively.
The Purchasing Managers’ Index (PMI) survey published by the CBN for the month of June 2018 showed an expansion, and represents an increase over May 2018.
The Manufacturing and Non Manufacturing PMI figures increased marginally to 57.0 and 57.5 points in June respectively, from 56.5 and 57.3 points in May. These marginal increases signify fragile economic recovery. FSDH Research believes measures to stimulate growth are required. Looking at the economic recovery path in first quarter 2018, FSDH Research revised its GDP growth forecast for 2018 to 2.78 per cent down from our previous forecast of 3.16 per cent. The expected growth in government’s spending in the second half of the year should increase economic activities, with positive impacts on the income of households and firms.
Although the external reserves remained relatively stable over the last two months, FSDH Research observed that it has been dropping consistently since July 6, 2018. The 30-day moving average external reserves decreased by 0.34 per cent, down from $47.61billion at end-May to $47.45 billion at July 18, 2018.
The total foreign exchange (FX) inflows through the Investors’ and Exporters’ FX Window between January and 19 July 2018 stood at $18.54 billion. The total inflows for the month of July as at 19 July 2018 stood at US$1.17 billion. Given the run rate, July may record the lowest inflows since January 2018. Rising rates and yields in advanced countries, coupled with low yields in Nigeria and weak economic recovery may encourage FX outflows.
FSDH Research projected that the favourable crude oil production in Nigeria and price in the international market should continue to lead to accretion to the external reserves. This should maintain stability in the foreign exchange rate in the short to-medium term. The inflation rate has maintained a consistent downward trend since January 2018. FSDH Research’s forecast shows that it may drop to single digit in August 2018, provided there is no food crisis that could lead to escalating food prices.
The Research group also observed relative stability in the foreign exchange rate due to favourable crude oil production and price, and foreign capital inflows. FSDH Research notes that possible capital flight and adverse developments in the crude oil market are possible risks to stable prices.
The data from the CBN shows that net domestic credit decreased marginally by 0.57 per cent to N25.72 trillion in May 2018, from N25.86 trillion in December 2017. The net credit to the private sector shrank marginally by 0.37 per cent to N22.21 trillion during the same period.
Experts share the view that the weak economic recovery and rising crises in some parts of the country are responsible for the weak credit growth.
They have the same opinion that if the MPC members’ fear about the impact of fiscal injections and rising rate in the international market on domestic price stability does not materialise; policy easing may be required very soon. Notwithstanding the hold decision, FSDH Research expects the yields on FGN Bonds to rise further from the current levels.
The borrowing needs of the FGN and the rising yields in the international market will be the major drivers.
