MPC: Analysts call no rate change on capital flows volatility downsides

Analysts at Afri Invest Research have made a no rate change call as the monetary policy committee (MPC) meets this week.

“As with all meetings since July 2016, we expect the committee to maintain status quo on all policy rates. We expect
emphasis to be placed on the need to withstand a possible pass-through inflation from rising global inflation as well
as protect the economy and financial markets against rising downside risk of capital flow reversals,” they said.

They think the positive development in consumer prices within the last 14 months has presented the CBN with
an opportunity to begin to converge monetary policy rate (MPR) with market interest rates, which have since priced-in inflation expectation.

They, however, posit that the decision would be delayed due to the ongoing capital flow reversal and asset prices volatility in emerging and frontier markets which is a downside risk to what has come to be the CBN’s prime policy anchor – exchange rate stability.

“The current capital flow reversal has been the strongest test for liquidity in the Investors’ and Exporters’ Window (I&E Window) so far; a test it is yet to pass with flying colors. The CBN has responded to the volatility in the Fixed

Income market and increased demand for FX by tightening liquidity in the money market in the past two weeks,”pointed out.

“We believe the odds of the MPC slashing the MPR in the same period it is aggressively sterilizing liquidity is slim; hence we expect the CBN to maintain status quo on all rates.

“Regardless, as we have argued in previous notes, an MPR cut (either at next week’s sitting or subsequent ones) will have little impact on fixed income yields as the CBN has already set in motion the easing cycle by deliberately guiding market rates downwards in the last three quarters, in addition to knock-on effects of the FGN fiscal strategy to reduce domestic debt issuance.”

They opined that developments in the global economy and financial markets are likely to be viewed with
mixed feelings by the MPC, that on one hand, favorable economic data in the US (US retail sales reports and Consumer Price Index data) have strengthened markets’ conviction of further rate hikes by the US Fed, resulting in an upward repricing of US bond yields to record highs while the US Dollar has risen.

“Much like the ‘taper tantrum’ of 2013, which led to a rout in asset prices across emerging markets, the feed-
back effect of rising bond yields and strengthening US dollar was felt in emerging and frontier markets in the last three weeks as LCY (local currency) fixed income instruments were sold off while currencies came under pres-
sure.

As a result, the JP Morgan EM bond index is down 2.3 percent in May while the MSCI EM Currency index has lost 3.1 percent since peaking in April,” they noted

However, much to the delight of policymakers in commodity-exporting countries, oil prices hit $80.0/b mark during the week – its highest since June 2014 – against the backdrop of the US exit from Iran’s nuclear deal as well as falling inventory levels and subsisting impact of OPEC’s production cut deal.

They noted that higher commodity prices are a boon to Nigeria’s external sector stability and fiscal balance, but it also comes with the attendant risk of ballooning state’s petrol subsidy.

“On a balance of risks, we believe that external sector developments remain broadly favorable for Nigeria, supportive for economic growth and current monetary policy stance. Yet, the

MPC will likely maintain its cautious view due to emerging downside risk of capital flow reversals.”

In the domestic landscape, economic data releases since the last MPC meeting have mirrored current positive outlook for the economy, they said, adding that the Purchasing Managers Index (PMI) released for April indicated an expansion in the economy (Manufacturing PMI stands at 56.9 while Non-Manufacturing PMI at 57.9) while disinflation trend extended to the 15th consecutive month in April.

FX rate has already remained stable in all segments while external reserves have stabilized around the US$47.5
billion mark.

Equally, the NBS is equally due to release Q1:2018 GDP numbers, which the analysts expect to show continued expansion driven by low-base effect of oil sector GDP as well as rebound in trade and ICT.

“Sub-3.0% is however still substantially below long-term trend and potential, implying further policy accommodation and structural reforms will be required to reduce the output gap.”