United Capital, FBNQuest analysts call no shift in monetary stance as MPC meets

Ahead pronouncement from Nigeria’s central bank on the outcome of its monetary policy meeting, analysts calls indicate there would be no change in policy rate in the near term, citing current improvements in key economic variables in spite of instability in the global economy as reason for their assumptions.

Analysts at both FBNQuest and United Capital research say the decision to tweak policy rates will depend on stability in the global and domestic economy, adding that though the prospect of economic recovery is strengthening in the local economy, conditions in the global market remain largely volatile

Specifically, United Capital research analysts are of the view that events in the global market point to further tightening rather than easing policy rate in the interim.

“We do not foresee any swift policy shift in the monetary policy space in the short to medium term, given that conditions in the global and domestic market environment, which informed a hawkish stance in the first place, remain fragile and unstable,” they noted.

They also stressed: “Even though key variables in the domestic market are showing signs of improvement, commodity prices in the global market remain unsteady. Also, the propensities for increased trade protectionism in the global economy is getting stronger across regions while policy normalization in the US continues to strengthen the US dollar. These factors will force the MPC to maintain status quo in the interim,” they stressed.

For FBNQuest analysts, they do not see any shift in policy stance now since confidence has returned to both the money and capital markets after the committee had experienced an 18-month’s despair, thanks to the investors’ and exporters’ foreign exchange window.

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“We again see no change in stance. The committee has emerged from about 18 months’ despair with growing confidence. The trigger, of course, has been the investors’ and exporters’ fx window (NAFEX), which is evident from a reading of members’ personal statements from their meeting in late May,” they said

After raising the benchmark interest rate by a cumulative 300 basis points in 2016, the Monetary Policy Committee (MPC) has kept policy rates in the last six sittings (July-2016 to May- 2017) unchanged.

In its last meeting for H1-17, the Monetary Policy Rate (MPR) was held at 14.0 percent; the asymmetric window around the MPR retained at +200 & -500bps; Cash Reserve Ratio (CRR) at 22.5 percent, and Liquidity Ratio at 30.0 percent amid aggressive liquidity mop-up at the money market.

Since then the CBN has maintained a hawkish policy stance targeted at stoking FX market liquidity amid global economic uncertainties arising from US trade protectionism; unstable commodity prices, policy normalization and steady appreciation of the USD. This has been the mainstay of naira stability in the domestic market.

The FBN analysts point to the fact that the committee and the CBN can see that gross official reserves have stabilized despite the step-up in foreign exchange interventions, that manufacturers have greater access to imported raw materials, and that the retail segment can buy forex to meet its demand for invisible payments, and so would do nothing in the short-term to change rates.

“NAFEX may not yet have attracted the major players in the offshore portfolio community but the committee will surely urge patience. We may well see the catch-phrase ‘fine tuning’ in the communiqué,” the EBNQuest analysts said.

The United Capital analysts noted that with MPR at 14.0 percent relative to a 12-month average inflation rate 17.6 percent, effective rates at the fixed income market have been tracking the weekly OMO auction rates of 18.0 -18.5 percent by the apex bank with average yield at the fixed income space steadying at 17.5 percent since Q3-16 compared to 12.5 percent in Q2-16.

“Consequently, the timing of an adjustment in MPR and the conduct of the CBN at the weekly OMO auction have become the most monitored variables in the fixed income market. This is because any adjustment in rates for forwards or reduction in OMO is expected to trigger a swift repricing of debt securities across tenors,” they pointed out.