Access Bank Plc Expects MPC to Retain MPR at 14%


Monday, November 21, 2016 6:35/ PM /Access Bank Plc /Economic Intelligence Unit

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will hold its final meeting for the year on the 21st and 22nd of November 2016. As usual the MPC will consider the domestic and international economic and financial market conditions, following which it will announce changes - or lack thereof - to monetary policy.  

Global Economic and Financial Developments
According to October's edition of the International Monetary Fund’s (IMF) World Economic Outlook (WEO), global economic activity is expected to grow 3.1% this year, compared to 3.2% in 2015. The IMF's forecasts for 2016 were unchanged from July as the downward revision for the US growth was offset by an upward revision for India and Russia.

In addition, the IMF estimates global growth will accelerate next year to 3.4%, mainly supported by assumptions for improvements in economic activity in emerging markets and developing economies, in tandem with an acceleration in economic growth in the US.

Oil prices ticked up after the Organisation of Petroleum Exporting Countries (OPEC) announced a deal to limit crude output in September. Under the agreement, reached in Algiers, cartel members would decide at the group’s next formal meeting, on November 30 in Vienna, on details of trimming production by up to 700,000 barrels a day, from a current level of just over 33 million barrels a day. Nigeria’s benchmark crude, Bonny Light, rose to as high as $52.07 per barrel in the immediate aftermath of the news, before settling at $43.54 per barrel on November 17, 2016.

Central banks across the advanced economies have acknowledged the limits of stimulus policies, and have called for structural reforms. The European Central Bank, Bank of Japan and the Reserve Bank of Australia all opted to keep interest rates unchanged in October. The U.S. Federal Reserve also kept interest rates unchanged early in November but set the stage for a hike in December amid signs the economy is picking up steam.

A different type of “uncertainty” has been introduced by the unexpected emergence of Donald J Trump as the president elect of the United States of America. Analysts believe that Trump’striumph will have repercussions on markets and ramifications for global stability.

These concerns draw largely from statements made by Trump during the campaign period. Pending the release of a comprehensive policy paper, how Trump intends to implement his campaign rhetoric, particularly his views on the U.S economy, foreign policy and immigration remains anyone’s guess.

Domestic Economic Developments
On the domestic scene, the CBN’s deliberation will focus on a number of key macroeconomic variables namely;  

Interbank money market rates have increased since the last MPC meeting. Average Open Buy Back (OBB) and Overnight (ON) money market rates settled at 17.86% and 18.73%, respectively as at November 15, 2016 compared to 23.53% and 25.37% in September.

Longer-dated instruments such as the 90-day NIBOR also closed up at 21.26% on November 16, 2016 compared to 19.84% on September 30, 2016. Higher money market pricings were largely in response to strained liquidity conditions caused by periodic foreign exchange and bonds sale by the apex bank.

Exchange Rate
On the Forex scene, pressures on the naira persisted as the liquidity crisis in the currency market continued on the back of supply shocks. The local unit reached an all-time low of N480/$ on the parallel market in October, before settling at N465/$ on November 16, 2016.

At the interbank, naira closed at N305.5/$ on November 16, 2016, a marginal appreciation compared to N311.62/$ on September 30,2016. In a bid to support the local unit, the apex bank appointed Travelex, a global foreign exchange (FOREX) dealer, to meet increasing demand from bureaux de change (BDCs). 

External Reserves
Notwitsthanding the improvement in oil price in the international market, the nation’s foreign reserves continued to shrink. The stock of the national reserves lost about $640 million in the period since the last MPC meeting to a low of $24.2 billion as at November 16.

The gross foreign reserves were enough to cover roughly 4 months of estimated imports of goods and services, above the internationally acceptable minimum of 3 months. The contraction in reserves was largely due to constant interventions in the interbank market by the regulator, aimed at supporting the local currency

Nigeria’s gross domestic product contracted by 2.06% in the second quarter, according to the most recent GDP report published by the National Bureau of Statistics (NBS). The oil sector shrank by 17.48% in the second quarter, compared with a 1.89% contraction in the first quarter.

The pace of decline in the oil sector came on the back of lower oil production, with average oil output down 360,000 barrels per day (bpd) to 1.69 million bpd as a result of increased militant activity in the Niger Delta region.

The non-oil sector, which was the main driver of Nigeria's recent period of robust economic growth, shrank by 0.38% in the second quarter, deteriorating from a 0.18% decline in the first quarter.

Inflation accelerated for the 9th consecutive month in October, edging up to 18.3% from September’s 17.9%. marking the highest reading since October 2005. According to the National Bureau of Statistics (NBS), inflation was fuelled by higher prices across all categories, particularly for electricity and fuels as well as imported food products.

Food inflation accelerated to 17.1% in October from 16.6% in September, as the cost of meat, bread and cereals increased, the statistics agency said. Core consumer prices, which exclude farm products and energy prices, increased to 18.1% in October from 17.7% in September.

Our Position
Following our analysis of international and domestic economic developments, we expect the MPC to reach the following decisions at the conclusion of its meeting:

·         Retain MPR at 14%, leaving the asymmetric corridor of +200 basis points and -500 basis unchanged: The MPC conceded that it is limited in its capacity to affect GDP growth and noted that monetary loosening would be undesirable in the context of sustained FX imbalances and a steep inflation profile.

·         Retain the Cash Reserve Requirement (CRR) at 22.5%.

·         Retain Liquidity Ratio at 30%.

·         We anticipate no change in the FX policy stance by the CBN. Latest indications on the FX policy front are that the Trade and Investment ministry and the CBN are in discussions over ways to ensure supply of FX to the manufacturing sector.

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