MPC Expected to Hold Rates - Considerations and Policy Options


Wednesday, July 23, 2015 6:34 AM / FSDH


The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is expected to hold its fourth meeting for the year 2015 between July 23-24, 2015. As usual, the MPC would consider the domestic and international economic and financial conditions in order to implement policies that would influence the Nigerian economy and financial market in the next few weeks. At the end of its May 2015 meeting, the MPC maintained the Monetary Policy Rate (MPR) and the Liquidity Ratio (LR) at 13% and 30% respectively, while it harmonized the Cash Reserve Requirement (CRR) on public and private sector deposits at 31%. The pressure points at the moment relate to the exchange rate instability, rising inflation rate and declining oil price. 

The latest Global Economic Prospect, June 2015 edition of the World Bank forecasts global growth at 2.8% and 3.2% in 2015 and 2016, respectively. The high-income countries are expected to grow at 2.0% in 2015 and 2.3%, on average in 2016–17. The expected growth pickup reflects the recovery in the Euro-area, continued robust activity in the U.S., and the increased traction from Japan’s monetary, fiscal, and structural policy efforts. In the U.S., growth is expected to strengthen to 2.7% in 2015 and further to 2.8% in 2016. Euro-area growth is now projected to reach 1.5% in 2015, increasing to average 1.7% in 2016-17. In Japan, growth is forecast to average 1.1% in 2015, before accelerating to 1.7% in 2016, supported by expansionary policies. The growth in Brazil, Russia, India, China and South Africa (BRICS) countries is soft and has increasingly diverged. China is expected to decelerate modestly to 7.1% in 2015, decelerating to 7% and 6.9% in 2016 and 2017. Nigeria is expected to grow by 4.5% and 5.1% in 2015 and 2016 respectively. The International Monetary Fund (IMF) in its World Economic Outlook (WEO) Update, July 2015 edition stated that the underlying drivers for a gradual acceleration in economic activity in advanced economies remain intact. The uneven and unbalanced growth in the global economy would put a lid on the possibility of a sustained level of demand for oil in the international market; thereby putting further pressure on the revenue flow of the government.


Looking at the trend analysis of the yield on the 1-year U.S. Treasury Bill and the 1-year Nigeria Treasury Bill (NTB), we observed that the premium between the yields on the two bills decreased marginally to 14.63% as at July 21, 2015 from 14.71% as at May 19, 2015. Despite the decline on the NTBs it is more attractive than most of the comparables. Other than the currency risk, this yield is very attractive in absolute term. The rising inflation rate and the demand pressure on the foreign exchange reduce the attractiveness of the real yield to the foreign investors. 

Comparing tenor for tenor, the average inter-bank market rate increased between the last MPC meeting on May 18-19, 2015 and July 21, 2015. As at July 21, 2015 the average 30-day, 90-day and 180-day Nigerian Inter Bank Offered Rate (NIBOR) closed at 14.90%, 16.18% and 17.18% respectively, from the May 19, 2015 closing figures of 14.73%, 15.67% and 17.02% respectively. The average yields on the 90-day, 182-day and 364-day NTBs showed mixed performance during the review period. The average yield on the 91-day Nigerian Government Treasury Bill (NTB) decreased by 5 basis points to close at 10.15% as at July 21, 2015, while the average yield on the 182-day NTB and 364-day NTB closed unchanged at 13.62% and 14.94%, respectively.

The inflation rate has been on an upward trajectory since the last MPC meeting in May 2015. The pressure on the inflation rate stems from the negative impact on consumer good prices from the scarcity of Premium Motor Spirit (PMS), the catch-up of the devaluation of the Naira on domestic prices, the late start of the rainy season and the renewal of the insecurity challenges in the North-East. The latest inflation rate for the month of June 2015 stood at 9.2% from the 9.0% in May 2015. Our projection shows that the inflation rate would increase to 10% at the end of 2015 and above the CBN’s target range of 6-9%. However, we reiterate that a hold in policy rate is consistent with the short term inflation outlook, as an increase will not in any way reduce the inflation rate. 


The overhang of excess supply of crude oil in the international market in the face of the weak global demand continues to put a lid on Bonny Light price and other oil variants from moving above the US$70/b. The Bonny Light price decreased by 13.96% to US$56.75/b on July 21, 2015 from US$65.96/b on May 19, 2015. The latest Nuclear Deal with Iran may also increase global oil supply and take additional market from Nigeria. 



The official and inter-bank market rate at the foreign exchange market appreciated and recorded increased convergence between the last MPC meeting and July 16, 2015. However, the parallel market rate depreciated during the period as the demand for foreign exchange increased in the market segment due to the CBN’s restriction placed on 41 imported items from having access to funds in the Nigerian foreign exchange market. We estimate that about US$16bn would be saved if the CBN maintains the policy and the fiscal authority endorses it. We expect the CBN to continue with this administrative measure in the management of the foreign exchange. 


The supply restriction on some imported items in the Nigerian foreign exchange market has reduced the demand pressure on the external reserves in recent time. The 30-day moving average external reserves increased by 0.59% to US$29.96bn as at July 16, 2015 from US$29.80bn on May 19, 2015. We do not expect the MPC to increase the MPR or carry out a further devaluation of the Naira to boost foreign exchange inflows. An increase in the MPR and devaluation would lead to higher inflation rate.

The overriding objective of conserving the external reserves and maintaining the relative stability in some segments of the foreign exchange market would pre-occupy the discussions at the upcoming MPC meeting. Additional fiscal policy would be required to ensure that the stability of the Naira and accretion to the external reserves. We expect majority of the MPC members to decide against the devaluation of the Naira and the increase in the MPR at this meeting. Thus, we expect members of the MPC to vote to retain the policy rate and other rates.

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