MPC Meeting: Considerations and Policy Options - A Need for Additional Measures?

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Saturday, January 17, 2015 8.17 PM / FSDHGroup Research 

Here is FSDH’s expectations on the Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN), holding between Monday, January 19 and Tuesday, January 20, 2015. 

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is expected to hold its first meeting for the year 2015 between January 19-20, 2015. As usual, the MPC is expected to consider the domestic and international economic and financial conditions in order to implement policies that will influence the Nigerian economy in the next few weeks.

At the end of its November 2014 meeting, the MPC increased the Monetary Policy Rate (MPR) to 13% from 12%, with the interest rate corridor of +/-2%; increased the Cash Reserve Requirement (CRR) on the private sector funds to 20% from 15%; moved the mid-point of the foreign exchange rate to US$1/N168 with a band of +/-5% from US$1/N155 with a band of +/-3%; while it maintained the CRR on the public sector funds at 75% and the Liquidity Ratio (LR) at 30%.  

Looking at the external factors, the plunging oil price is beginning to alter the world economy. The oil importing countries are recording savings which is helping to stimulate consumption, while the drop in the oil price is causing fiscal and monetary instabilities in the oil exporting countries. Beyond the gains in the declining oil price for the importers, there is the tendency for a deflation in some major economies. The inflation rate for the month of December 2014 in the U.S. is 0.8% down from 1.3% in November. In the Euro-Area, it is a negative 0.2%. Although the unemployment rate in the U.S. dropped to 5.6% in December 2014, the tendency for a deflation may trigger an action which will help lift oil price.
 

Meanwhile, it is widely believed that the European Central Bank (ECB) would begin an asset purchase programme in Q1 2015 to stem the deflationary tendency in the Euro-area. This is expected to stimulate economic activities, and encourage capital flows to the emerging market economies. Looking at the trend analysis on the yield of the 1-year US Treasury Bill and the 1-year Nigeria Treasury Bill (NTB), we observed that the premium between the yields on the two bills increased to 14.82% as at January 14, 2015 from 12.35% as at November 26, 2014. The increase in the current premium is capable of attracting more investments in the NTBs provided there is internal stability. The CBN would sustain its Open Market Operation (OMO) transactions geared towards creating attractive yields in order to retain and attract foreign exchange inflows.  

The CBN’s Staff projection for the GDP growth in Nigeria for 2014 is 7%, compared with the 4.2% and 5.5% recorded in 2012 and 2013 respectively. According to the National Bureau of Statistics (NBS), the GDP growth of 6.23% in Q3 2014 was driven by the non-oil sector of the economy. Although the GDP growth rate has slowed down, lowering rates may not help boost growth under the current conditions.
 

Comparing tenor for tenor, the average inter-bank market rate increased between the last meeting on November 24-25, 2014 and January 14, 2015. As at January 14, 2015 the average 30-day, 90-day and 180-day Nigerian Inter Bank Offered Rate (NIBOR) closed at 15.18%, 15.52% and 16.25% respectively, from the November 26, 2014 closing figures of 13.44%, 13.98% and 14.82% respectively. Similarly, the average yields on NTBs increased since the last MPC meeting.  

The average yield on the 91-day Treasury Bill (TB) increased by 117 basis points to close at 11.42% as at January 14, 2015, the average yield on the 182-day TB increased by 378 basis point to close at 15.20%, as well as the average yield on the 364-day TB which increased by 407 basis points to close at 18.33%. We do not expect the MPC to further raise the MPR at this meeting, as the OMO and NTBs transactions are achieving desirable results.  

The monetary policy stance of the CBN and the favourable price of food products in the international market ensured that the average inflation rate in 2014 was in the preferred single digit range of the CBN. The December 2014 figure stands at 8.0%. The potential threat of an upward bias on the inflation rate is still present from the recent devaluation of the Naira, the security challenges in the country, the electioneering spending, and the possible removal of oil subsidy towards the second half of 2015. However, we expect the inflation rate to remain in the single digit in the short-term, with a moderating effect from the favourable price of food in the international market and the drop in the oil price. We do not expect a hike in rate in order to stem inflation rate expectation in the short term. 

The increase in global oil supply, particularly from the U.S. shale oil production; the intention of the major Organization for Petroleum Exporting Countries (OPEC) members to maintain market shares, receding geo-political concerns about supply disruptions and the U.S. Dollar appreciation are the major reasons for the current decline in the crude oil price at the international market. The sharp decline in the oil price, in recent time has put a strain on the Nigerian economy, with frequent request for the downward review of the oil benchmark in the 2015 Budget. The Bonny Light price shed about 50.11% of its value to close at US$55.86/b in 2014, compared with 2013. The current oil price undermines the ability of the government and the CBN to achieve their short-to-medium term fiscal, monetary and exchange rate policy objectives. Although there are pressure points in the economy, a hold in policy rates would be appropriate as hike in rates would not address the fundamental problem of declining oil price.
 

The amount of Dollar offered for sale at the foreign exchange market after the last meeting of the MPC and January 12, 2015 stood at about US$1.95bn, a decrease of 66.09% from the US$5.75bn offered between the September and November 2014 meeting. Also, the amount sold decreased by 51.36% to US$2.76bn from US$5.66bn during the period under review. It is of note that the CBN stopped sales on December 17, 2014 and resumed the sale of foreign exchange at the official market on January 05, 2015. We note that the CBN offered US$200mn but sold a total of US$666.99mn on November 26, 2014.  

The CBN has also reduced the Net Open Position (NOP) of banks to 0% from 1% and then to 0.1%, as well as the implementation of various administrative measures to stem the increased demand at the official market, while it continues to drive the different segments of the market towards convergence. The exchange rate at the official market has depreciated after the last meeting of the MPC in November 2014, having depreciated by 1.71% to close at N158.41/US$1 on November 19, 2014, majorly on the increased demand from foreign portfolio investors stemming from their concerns about the decline in the crude oil price and the negative impact on the external reserves and the value of the Naira.
 

The use of the external reserves to defend the value of the Naira led to a significant decrease in the external reserves in 2014. The external reserves position declined by about US$2.41bn between the last MPC meeting in November to close at US$34.51bn as at January 13, 2015. We believe that the MPC will continue with the various administrative measures it had introduced in 2014 aimed at achieving exchange rate stability, as it also strives to achieve convergence of the foreign exchange rate in the different segments of the market.  

A relaxed policy would not be appropriate in the eve of a general election. In addition, the current global condition with respect to the declining oil price would not necessitate a drop in rates. A restrictive monetary policy stance at this time would further heat-up the domestic financial market and may lead to a loss of confidence. We expect the MPC to maintain a hold on all its policy rates at this meeting. 

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