Friday, September 18, 2015 21:33 PM / Access Bank
The major highlights of the Meeting are likely going to be:
1. Retain MPR at 13%, leaving the +/-200 basis points corridor unchanged:
2. Review the Cash Reserve Requirement (CRR) downwards to 21% in order to accommodate liquidity shocks likely to arise from TSA implementation.
3. Retain Liquidity Ratio at 30%.
4. Retain the net open position limit (NOPL) on foreign exchange trading position of banks at 0.5%.
5. Retain the existing order-based quoting system in the interbank FX market.
The Central Bank of Nigeria (CBN) will convene its two-day Monetary Policy Committee (MPC) meeting starting on Monday 21st September to decide on monetary policy setup in the near-term. Along with recent global developments, deliberations in the course of the meeting will be dominated by weak domestic growth outlook, creeping inflation and exchange rate uncertainties.
Other issues expected to top the agenda include low oil prices and financial system liquidity as a result of implementing the treasury single account (TSA) directive by President Buhari.
International Economic Developments
Recent data paint a mixed picture of the global economy. In the US, and to a lesser extent the UK, output has recovered and unemployment has fallen, but growth remains frail in the Eurozone and uneven in Japan. China's struggle to contain the market upheaval since it devalued the yuan earlier in August remains a significant source of concern for global markets.
After a brief rebound in June, oil prices once again trended lower in late August, with Bonny light dipping to as low as $42.54 per barrel before edging up slightly in recent weeks.
Moderate growth and weak prices for many key commodities besides oil are reinforcing the likelihood of a more prolonged period of very low global inflation.
Reflecting the recent run of weak data, the IMF stated that 2015 growth is likely to be lower than the 3.3% predicted in July. It equally called for concerted policy effort to address these challenges, including continued accommodative monetary policy in advanced economies; growth-friendly fiscal policies; and structural reforms to boost potential output and productivity.
Concerns over the health of the global economy and low US inflation prompted the US Fed to delay plans to hike interest rate at its September meeting. However, given that the US unemployment rate has now fallen to the lowest level since April 2008 it is still expected that the Fed could raise its benchmark interest rate before the end of the year.
Domestic Economy and Financial Developments
Average Open Buy Back and Overnight money market rates settled at 11.61% and 10.46% in September, compared to 33.43% and 30.95% respectively in August. Elevations in the open buy back and overnight cash market pricings in August were largely driven by the CBN’s new pre-funding policy requiring banks to pay for FX purchases 48 hours in advance and periodical open market operations by the financial regulator. Longer-dated instruments such as the 90-day NIBOR however reflected a far less volatile course. The operationalization of the Treasury Single Account (TSA) system is expected to strain systemic liquidity, sending rates higher in the coming weeks.
The naira has remained relatively steady at the interbank market since the last MPC seating two months ago. The local unit was stable at N199.10/USD at the interbank foreign exchange market segment, while retaining its peg to the CBN clearing rate which also held firm at N197/USD. Stability in the interbank exchange rate has come on the back of the CBN’s order-based quoting system.
An analysis of the movement in foreign reserves shows that in the period between July-end to September 15, Nigeria's foreign reserves have remained consistently above $30 billion, though sticky downwards. Specifically, the nation’s external coffers recorded $31.45 billion, $31.32 billion, and $30.79 on July 31st, August 31st and September 15th respectively. The relative stability seen in reserves reflects the introduction by the CBN of administrative measures aimed at curtailing the demand for FX. In particular, the recent decision to exclude 41 items from accessing FX at the interbank segment has supported accretion to reserves.
According to the National Bureau of Statistics (NBS), Nigeria’s consumer price inflation continued its upward trend in August. The Consumer Price Index (CPI) which measures inflation edged higher to 9.3% y/y, from 9.2% in July. The reading on the food sub-index ticked higher to 10.1% y-o-y, up from 10% y-o-y in July. Meanwhile, the core (all items less farm produce) sub-index recorded inflation at 9.2% y-o-y in August, 0.2 percentage points higher than July’s figure, mainly due to higher readings for housing, water, electricity & other fuels, restaurant and hotels, and miscellaneous goods and services. The inflation figure for August now reflects the highest reading since March 2013, and has breached the upper band of the CBN’s inflation target.
Newly released data by the National Bureau of Statistics (NBS) showed Nigeria’s economic growth slowed to 2.35% in the second quarter of 2015 from 6.54% in the same period last year, and 3.96% y-o-y in Q1 2015. This was the worst quarterly outturn since comparable statistics began in 2011. The oil industry contracted by 6.8% y-o-y in Q2 as crude oil production declined from an average of 2.18 million bpd in Q1 to 2.05 million bpd in Q2. On a slightly more positive note, the construction industry remained a key growth driver, expanding by 6.42% y-o-y in Q2 – this still represented a slowdown from the growth rate recorded in Q1 (11.17% y-o-y).
Conclusion: The Access Bank 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 13%, leaving the +/-200 basis points corridor unchanged: While inflationary pressure remains biased to the upside, we expect that rates will remain on hold for the following three key reasons:
Review the Cash Reserve Requirement (CRR) downwards to 21% in order to accommodate liquidity shocks likely to arise from TSA implementation.
Retain Liquidity Ratio at 30%.
Retain the net open position limit (NOPL) on foreign exchange trading position of banks at 0.5%.
Retain the existing order-based quoting system in the interbank FX market. Despite the announcement that Nigeria will be phased out of the J.P. Morgan GBI-EM index series by 30th October 2015, we believe a currency devaluation is not on the table at this point given repeated comments by the CBN governor and the government that the currency is accurately priced and that rent-seeking behaviour was to blame for the current position.