MPC likely to hold its fire


Thursday, July 23, 2015 10:45AM / FBN Capital Research   

The latest meeting of the monetary policy committee (MPC) opens today in Abuja, and the focus of the market remains on the naira exchange rate. It (the market) is hoping for change but we suspect that it will again be disappointed.

The committee and the CBN can point to an increase in reserves on a 30-day moving average basis each day since the end of June, to US$30.1bn as at 15 July. This puts into context the statement to the Senate by the CBN governor that reserves had recovered to US$31.9bn on, we assume, a spot basis (Good Morning Nigeria, 09 July 2015).

Since reserves have started to pick up and since the interbank rate has been stable, this argument runs, what is the reason for another adjustment?

The authorities favour administrative measures to counter perceived speculators and rebuild reserves. The most recent was a circular dated 16 July stipulating that all transactions at bureaux de change had to show the customer’s bank verification number.

The more substantial circular (of 23 June) listed 40 import items which are no longer eligible for fx from official sources. This helps to explain the reported accumulation of reserves and the steady fall of the naira on the parallel market south of N240 per US dollar.

In time we think that the MPC will close the gap between the interbank and parallel rates but not until later in the year.

The steady pick-up in y/y inflation on a headline and, more importantly, a core basis for six successive months would normally prompt a hike in the 13.00% monetary policy rate. Further, the headline rate of 9.2% y/y is now above the official target range and is projected in the latest CBN in-house forecasts to climb to 10.1% y/y in October.

Those imports listed in the circular of 23 June have to be funded at the parallel market rate so we do not expect inflationary pressures to subside. We continue to see a policy rate increase of 100 bps before year-end.

Our take on this week’s meeting is not influenced by the fact that President Buhari has yet to appoint a federal executive council (cabinet). The committee and indeed the CBN enjoy considerable autonomy.

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