Monetary Policy Committee Decision Review - Access Bank Plc


Monday, September 19, 2016 2.49pm/ Access Bank Plc/ Economic Intelligence Group

The Central Bank of Nigeria’s Monetary Policy Committee (MPC) will meet on the 19th and 20th of September 2016. Based on analysis of the prospects for global growth, domestic output, inflation, foreign reserves, financial stability concerns as well as developments in money markets, the Committee will determine the configuration of monetary policy for the near-term.

Recent economic data suggest that the global economy remains stuck in the slow lane. Global business activity, as measured by Purchasing Managers' Indices (PMI), continued to expand only at subdued rates in August. For example, the JPMorgan Global PMI, compiled by IHS Markit from its various national surveys, inched only marginally higher to 51.6 in August from 51.5 in July.

Across advanced economies, growth in the second quarter of 2016 has been slower than anticipated, and the outlook is still mixed. Headwinds in the United States from declining inventory investment were offset somewhat by strong job-creation numbers. In the Eurozone, the re-emergence of stress in some parts of the banking sector and the Brexit vote increased uncertainty.

In Japan, downside risks have intensified in the form of a stronger yen, deflationary risks and contracting industrial production, triggering accommodative monetary and fiscal policies.

Among emerging market economies, activity remains varied. GDP growth stabilised in China in the second quarter, on the back of strong stimulus. Manufacturing activity was weak in August due to adverse weather and subdued export demand, although smaller firms recorded an uptick in new orders. Recessionary conditions are gradually diminishing in Brazil and Russia, but the near-term outlook is still fragile due to policy uncertainties and soft commodity prices.

The International Monetary Fund early this month hinted that another downgrade in global growth projections was likely when it publishes its next economic outlook in October. In the Fund’s last world economic outlook, published in July, it downgraded its global growth projections for 2016 and 2017 by 0.1% on April’s forecast, which itself was a 0.2% cut to the growth the fund predicted in January.

Domestic economic developments

On the domestic scene, the CBN’s deliberation will focus on a number of variables namely:  

Money market pricings were elevated in August, with overnight (ON) and open buy back (OBB) interbank rates averaging at 17.9% and 16.48% respectively compared to 15.38% and 14.31% respectively in July. Month-to-date, September 2016 money market pricings have risen further, with ON and OBB interbank rates averaging at 23.70% and 21.81% respectively, primarily due to the tightening stance of the monetary regulator.

Longer-dated instruments such as the 90-day Nigeria Interbank Offered Rates (NIBOR) also ticked upwards to 21.45% on the 15th of September from 18.36% as at July 26th, the date of the last MPC meeting.  

Exchange Rate
The naira has remained under persistent pressure as unmet demand continues to weigh on the local currency at both the parallel and interbank forex markets.

At the interbank spot market, dollar sales by the Central Bank of Nigeria (CBN) boosted liquidity where the naira closed at N308.69 to the dollar on 16th September – an appreciation of N1.38 or 0.45% over N310.07 recorded on July 26th.

At the parallel market, the naira weakened to the dollar, selling at N425/$ on 16th September compared to N377/$ on July 26th. 

External Reserves
Year-to-date (September 14th), the nation’s external reserves has declined by $4.15 billion or 14.28% from $29.07 billion as at December 31st, 2015, and $1.31 billion or 4.99% compared to $26.23 billion which it was at on July 26th.

The continued slide in the nation’s foreign currency coffers was largely due to unending demand pressure as the CBN has remained the major player in the interbank market since the inception of the new regime.

Meanwhile, the price of Bonny light, Nigeria’s reference crude, nudged higher to $46.6 per barrel on 15th September from $44.24 per barrel on July 26th.

Nigeria’s gross domestic product contracted by 2.06% in the second quarter, according to the latest 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, shrunk by 0.38% in the second quarter, deteriorating from a 0.18% decline in the first quarter.

Inflation rose to 17.6% year-on-year (y-o-y) in August, up from 17.1% y-o-y in July. This marked the seventh monthly increase in a row, and the highest level since October 2005.

A breakdown of the data showed that the increase in food inflation was the main driver of the rise in the headline rate. Food inflation jumped to 16.4% y-o-y in August from 15.8% y-o-y in July.

The core sub-index which excludes items subject to temporary price volatility increased by 0.3 percentage points to 17.2% y-o-y in August (16.9% in July). According to the NBS, highest increases were seen in solid fuels, vehicle parts, books & stationeries, and clothing.

Our Position
Taking into consideration the developments discussed above, 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 CBN has sent strong signals to the market that it will prioritize stemming inflation over promoting growth, as well as supporting the return of foreign capital. Thus, despite worries over the poor Q2 GDP outturn we see the MPC holding rates in a bid to signal consistency. We expect the Committee will once again reiterate the need for fiscal stimuli to reflate the economy.

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

·         Retain Liquidity Ratio at 30%.

·         Exchange Rate: The liberalized FX market will be maintained with continued ban on 41 items from the interbank window.

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