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20October2018

Nigeria’s MPC retains benchmark interest rate at 12%

At the last Monetary Policy Committee meeting, the committee found the current level of MPR at 12% appropriate in the light of the stability achieved with inflation which averaged 12.4% in the last 12 months. The decision has short term implications on the bond, equities and money markets. The expected stability in the FX market despite the threat of hot monies shows that interest is likely to go down in the short term.

Risk return characteristic of the bond market remains competitive

The inclusion of Nigeria government debt in the Barclay’s global bond index will further expand the exposure of the Nigerian debt market to global investors. And at the current yield level, which is perhaps the highest currently globally with the exception of Greece and Pakistan and other smaller African economies, Nigeria’s market is likely to remain competitive as a global portfolio investment destination with positive risk-return characteristics. With Japan joining the group of countries using massive quantitative easing to reflate their economies more aggressively, global cheap funds chasing carry trade opportunities could expand disproportionately. And the likely fall in inflation rate in the first quarter of the year, is expected to push real yield back into the positive region. In other words, there is nothing in the shorter horizon that suggests either a dry up or a reversal of FPI inflow into the economy.

Hence, we expect further yield contraction on the average in the short term even at negative real yield based on the average inflation rate of 12.4% in 2012. The duration trade along the curve in expectation of a fall in benchmark rate in the near future is expected to affect the shape of the curve.

Monetary Policy may matter less at determining the stock market direction

Despite the continued tightening of monetary environment, the stock market will continue to benefit from sustained portfolio inflow on the back of impressive valuation and corporate performance of listed blue-chip companies. The on-going reforms of the market including the market making initiatives which would support increased block sales to big global institutional investors; the reduced costs of transactions; and perhaps more advanced trading dynamics supported by new technologies would continue to encourage such inflow in the short term.

Tenacious systemic liquidity would remain impactful on money market rates

Short term interest rates are likely to decline further on the average on the back of tenacious systemic liquidity surplus regardless of CBN Treasury operation. While the short term outlook of the retail credit market is unchanged, it is not unlikely that the potential reduction in trading securities income, occasioned by yield contraction and fall in short term interest rates could push banks to expand the supply of credit. Savings and term deposit rates are not likely to change their present declining course as banks continue see increased liquidity in the short term.

Risks from hot monies- pro-cyclical monetary policy could tip the scale over in the medium term

The stability of the Naira exchange rate is also expected to be sustained by the strong FPI outlook in the short term. This is not to downplay the potential risk that the hot monies pose to macroeconomic stability. Although the current sovereign rating of the Nigeria economy complements the competitiveness of the yield structure currently, this could change if the current growth challenge persists. The rating revision could be triggered by a heightened fiscal sustainability challenge in the face of sustained decline in growth. And the current monetary tightening is pro-cyclical, which alongside the myriads of structural challenges, could help push growth further down to the point where a rating reversal could be inevitable.

Beyond that, the volatility of hot monies relies on sentiments. If crude oil price drop precipitously below the budget oil benchmark and fiscal sustainability is threatened, the ensuing flight to safety would destabilise the economy significantly. This threat is not impossible in the short term on the back of the US oil demand dynamics and increasing global supply.

The MPC threatens an ‘appropriate response’ if public spending goes overboard

On the fiscal policy for 2013, the committee expressed worry over the downside risk that the adopted US$79 per barrel budget benchmark poses to the inflation objective and the effectiveness of monetary policy in 2013. The committee pointed out the risk of complacency over government revenue especially in the face of the uncertainty in global demand for crude oil and weakening performance of non-oil sector. It sustained its threat to act appropriately if public spending in 2013 adds to inflationary pressure. If the ‘appropriate response’ means non-accommodating monetary policy, then we must brace up for further tightening during the year. This is particularly so because, the perceived threat to inflation from increased sub-national government expenditure in 2013 due to the higher benchmark oil price is the major reason why policy indicators were kept unchanged so as to monitor developments until the next MPC meeting in March.

At this point, monetary easing is becoming inevitable

The outlook for the monetary policy is benign and the argument in favour of non-accommodation is getting weaker. With two members of the committee out of ten voting for outright reduction of the MPR by 25 basis points at the just concluded MPC meeting, it is arguable that the monetary authority may be moving closer to a reversal down the line. Barring the threats from hot monies, against which monetary policy action is arguably ineffective at this point, and the remote fiscal sustainability issues, all indicators point to a reversal of monetary tightening.

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MPC retains policy indicators

The monetary policy committee (MPC) kept the key monetary policy indicators unchanged at the just concluded MPC meeting which was held on Jan 21, 2012 in Abuja, Nigeria. Expectedly, key factor in the decision to keep the benchmark interest rate unchanged include the perceived double hedged sword of risk due from the adopted oil price benchmark in the 2013 appropriation, in addition to the conflicting signals of the global economic outlook in the short term.  

 

 

Key Decisions:

MPR:     retained at 12% with the 200bsp corridor

CRR: retained at 12%

Liquidity Ratio: retained at 30%

The committee found the current level of MPR at 12% appropriate in the light of the stability achieved with inflation, which averaged 12.4% in the last 12 months.

While the committee considered a reduction in the MPR because of the benign inflation outlook and depressing growth prospects, the threat that fiscal stance poses are considered overwhelming. The increased sub-national government spending and Federal Government high expenditure in 2013, the higher benchmark oil price in the 2013 budget and the US debt ceiling with possible impact on commodity prices could destabilise the price objective of the monetary authority.

With two members of the committee voting for outright reduction of the MPR by 25 basis points amidst sustained clamour for the reversal of the monetary tightening, it is arguable that the monetary authority is moving closer to it. In this respect, market response to unchanged posture of the monetary authority at this meeting is likely to be read as such with key indicators maintaining trend. We are likely to see a sustained bond yield contraction as FPI keeps coming. Short term interest rates are likely to also remain either flat or decrease mildly on the average in the short term on the back of tenacious systemic liquidity surfeit regardless of CBN Treasury operation. The stability of the Naira exchange rate is also expected to be sustained by the strong FPI outlook in the short term. 

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