Thursday, March 19, 2015 5:13 PM / FSDH
Limited Options: Hold Rates
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is expected to hold its second meeting for the year 2015 between March 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 in the next few weeks.
At the end of its January 2015 meeting, the MPC maintained all its rates, as well as the mid-point of the foreign exchange rate at US$1/N168 with a band of +/-5%. However, following the persistent demand pressure at the foreign exchange market in the face of the declining oil price and the external reserves, the CBN suspended the Retail Dutch Auction System (RDAS) window, leading to a devaluation of the Naira.
The latest monthly oil report of the Organization for Petroleum Exporting Countries (OPEC) for the month of March 2015 stated that the combinations of high debt levels in the private and public sectors in many major economies, a weak labour market in the Euro Area, and slowing growth levels in the emerging economies, with the exception of India are all keeping global growth below potential.
The report added that beyond the gains from the declining oil price for the importers, there is the tendency for a deflation in some major economies. This dynamic has been positively counterbalanced by lower crude oil prices, which have supported consumption in some of the advanced economies, removed budgetary constraints in some emerging economies, and allowed major central banks to maintain monetary stimulus and even implement new measures.
There is also an increasing risk from the normalization of monetary policy in the U.S., and its negative impact on the global economy, but the beginning of the European Central Bank’s (ECB) quantitative easing programme in March 2015 could help to mitigate some of this negative impact from the U.S. when it finally kicks in.
The inflation rate for the month of January 2015 in the U.S. is a negative 0.10% (deflation), down from the inflation rate of 0.8% in December 2014. In the Euro-Area, it is a negative 0.30% in February 2015, an increase from a negative inflation rate of 0.60% in January 2015.
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 increased to 18.66% as at March 18, 2015 from 14.83% as at January 20, 2015. The current premium is attractive and ranks amongst one of the highest in the world, and capable of stimulating external and internal inflows into the government treasury bills market. The high yield is a disincentive for lending to the private sector; an additional increase in rate would not be desirable.
According to the National Bureau of Statistics (NBS), the Nigerian economy when measured by the Real Gross Domestic Product (GDP) grew by 6.22% in 2014, compared with 5.49% in 2013. On a quarterly basis, the GDP grew by 5.94% (year-on-year) in Q4 2014, compared with 6.77% in the corresponding period of 2013 and 6.23% in Q3 2014.
The GDP is majorly driven by the non-oil sector of the economy. Our forecast GDP growth for 2015 is 5.68%, representing a decline from 6.22% in 2014. Thus, under the current situation, a rate hike may further lead to a weakness in the GDP growth rate.
Comparing tenor for tenor, the average inter-bank market rate increased between the last MPC meeting on January 19- 20, 2015 and March 13, 2015. As at March 13, 2015 the average 30-day, 90-day and 180-day Nigerian Inter Bank Offered Rate (NIBOR) closed at 15.21%, 16.22% and 17.22% respectively, from the January 21, 2014 closing figures of 13%, 14.29% and 15.62% respectively.
However, the average yields on the 90-day and 182-day NTBs decreased since the last MPC meeting, while the average 364-day NTB increased. The average yield on the 91-day Treasury Bill (TB) decreased by 28 basis points to close at 11.24% as at March 18, 2015, the average yield on the 182-day TB decreased by 3 basis point to close at 15.24%, while the average yield on the 364-day TB increased by 61 basis points to close at 17.65%.
We expect the market forces to further drive up the yields in the short-to-medium term. This expectation is based on the expected rise in the inflation rate, weak fiscal position of the Federal Government of Nigeria (FGN) and the expected increased borrowing from the market.
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