Analysts call rate retention as Nigeria central bank seen focused on reining in inflation amid naira woes

Ahead decision of Nigeria’s central bank’s monetary policy committee (MPC) meeting Tuesday, financial analysts and the business community are forecasting policy rate retention on the grounds that the CBN would want

to focus on fighting inflation and shoring up the local currency.

The MPC has kept its interest rate at a record-high 14 percent since July 2016, trying to support the economy, and analysts say it would probably hold it there at its decision this week to contain above-target consumer-price growth.

The upswing in inflation may probably give the MPC, led by Governor Godwin Emefiele, room to hold off on a rate cut, according to all except one of 16 economists surveyed by Bloomberg.

Improved dollar supply by the CBN has helped ease inflation by reducing import costs, but at 16 percent in August, price growth remains outside the central bank’s target of six percent to nine percent.

“The most likely outcome is a split decision and a compromise around the maintenance of the status quo with fringe adjustments to the CRR and the width of the asymmetric corridor,” say analysts at Financial Derivative Company (FDC).

Particularly, high inflation and the “fragile” nature of the recovery “ are seen to undermining prospects for a rate cut, according to some other analysts, adding that as the current economic imbalances reduce, there might be a policy easing in either November or the first quarter of next year.

“The MPC may hold rates to maintain stable domestic prices compatible with economic growth objectives, while the government implements fiscal measures to sustain growth,” analysts at Lagos-based FSDH Merchant Bank

Ltd. are reported to have noted, adding: “Fiscal measures in the form of tax relief and tariff adjustment are required to boost economic activities.”

FDC analysts specifically noted that the outcome of the meeting would not be unanimous, and that given the developments in the domestic and international markets, they foresee two outcomes, one a retention of the

status quo and two, a shift to accommodation with a tweak in banks cash reserve ratios.

“In the final analysis, we expect an acrimonious debate amongst the committee members and we do not see a unanimous decision. Given the developments in the domestic and international markets, the most likely

outcomes in our view are:

“Scenario A – 55% probability: Maintain Status Quo. MPR: 14% p.a. with the asymmetric corridor at +200bps/ -700bps; CRR at 22.5 percent per annum; Liquidity ratio: 30 percent per annum;

“Scenario B – 45% probability: Token shift to accommodative monetary policy; Maintain MPR at 14 percent per annum; Lower the CRR from 22.5% to 21.5% but this will be tied to real sector lending; Reduce the width

of the asymmetric corridor by 150bps; Maintain the liquidity ratio at 30 percent per annum,” they maintained.

The FDC officials noted that most sub-Saharan African (SSA) countries left their monetary policy rates unchanged at their last MPC meetings with the exception of Ghana and Zambia.

The South African Reserve Bank did keep its benchmark repo rate at 6.75 percent p.a. at its September MPC meeting. This defied expectations of a cut based on a sluggish recovery from a recession in the first half of

the year. South Africa and Nigeria both emerged from a recession at the same time.

The hawks among the MPC might be affected by the copycat syndrome and argue that South Africa maintained status quo because of the upside risks to inflation, in spite of the country’s weak economic performance.

Nigeria’s economy expanded 0.6 percent in the second quarter, driven by growth in agriculture and in oil, which accounts for two-thirds of government revenue. Yemi Kale, Nigeria’s statistician-general indeed said in an August interview that it would take some time to return to above five percent, the level of economic expansion before prices and output of crude tumbled in mid-2014.