Monday, January 19, 2015 12:28 AM / Access Bank The Economic Intelligence Unit
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will hold its two-day Meeting on Monday and Tuesday January 19 and 20, 2015.
During this Meeting the Committee is expected to review local macroeconomic performance for Year-2014. This review will also take into consideration events in the global environment in the stated period. On the global front, two dominant themes loom large, namely; weaker oil prices and a continuing divergence among leading economies.
Unrelenting slide in oil prices
Having traded as high as $117.70 a barrel in June, the price of Bonny light crude oil has fallen precipitously over the last six months and ended 2014 at just under $60 a barrel – its lowest level for over five years. With the weakness in oil prices continuing this year and even quickening, a redistribution of income from producers to consumers has ensued - proving a bane to the former and providing a boon to the latter.
Marked disparity in the global economy
Widening economic and policy divergences have punctuated the global landscape, and created a multi-speed global economy. Thus, while the US appears to have achieved a moderate, sustainable growth path in 2014, China entered a phase of managed slowdown with growth rates stabilising below its recent historical average. Meanwhile, in Europe and Japan, the spectre of recession and deflation remains. These divergent trends pose downside risks, particularly with respect to volatility in financial markets as interest rates in major economies rise on varying timelines.
The combination of these risks, among others, prompted the World Bank to lower its global growth forecast for 2015. In its latest assessment released on 13th January 2015, the global lender projected the global economy will grow 3% in 2015, lower than a forecast of 3.4% made in June 2014.
Nigeria Macroeconomic Trends
On the domestic scene, deliberations will centre on the following macroeconomic indices:
Naira closed at its weakest level on record in the fourth quarter of 2014, and remains vulnerable to further upside pressure, owing to weak oil prices, shrinking foreign reserves and domestic capital flight. At the interbank market, the exchange rate stood at N184.10/US$ as at 12th January 2015, representing a depreciation of 3.62% from the closing rate of N177.67/US$ on November 28, 2014. At the CBN window, the local unit has remained stable at N168/US$ since the last meeting. Following sustained weakness over several weeks, the CBN issued a new foreign exchange regulation on 17th December 2014 aimed at supporting the local unit. The CBN’s circular reviewed net open position limit (NOPL) on foreign exchange trading positions of banks at the close of business, from 1.0% of shareholders’ funds (SHF) unimpaired by losses to zero. The apex bank, in a later circular, dated 12th January 2015 reviewed the foreign currency trading position limit to 0.1% of SHF. It further directed that dollars bought from the interbank market could be held only for up to 72 hours, after which they must be sold back to the CBN at its own day rate. By this regulation, the CBN seeks to curtail commercial banks’ ability to hold foreign exchange position, and subsequently limit foreign currency trading.
The slump in oil prices below $60 per barrel, along with increased RDAS demand, has undermined foreign exchange inflows and depleted external reserves. Between the end of November 2014 and January 12, 2015, the nations external reserves shed 6.28% to close at $34.49 billion. The external reserves which were $43.5 billion at the beginning of 2014 dropped to $34.47 billion as of December 31, 2014. The current level of external reserves is estimated to cover between 6 and 7 months of imports.
Inflation edged slightly higher in December, driven by a higher reading on the food (farm produce & processed food) sub-index. More specifically, headline inflation increased to 8% year-on-year (y-o-y) in December, up marginally from November’s reading of 7.9% y-o-y. Inflation has remained remarkably stable throughout 2014 and December marked the 24th straight month in which price increases remained in single digit territory, and within the CBN’s target range of 6-9%. The food (farm produce & processed food) sub-index increased by 9.2% y-o-y in December, compared to 9.1% y-o-y a month earlier. Meanwhile, the ‘all items less farm produce’ sub-index (so-called core CPI, which is closely tracked by the CBN) finally reflected some movement after four months of constant readings. Core CPI inflation declined to 6.2% y-o-y in December, 0.1 percentage points lower than November’s reading.
Tight naira liquidity following the implementation of the new Cash Reserve Requirement (CRR) led to the overnight lending rate increasing to 30% in the week ending December 5 from 12% previously. The rate rose further to 70% on Monday (December 8), before gradually declining thereafter. On December 11, the rate had declined to 20%, although it increased to 43.5% the following day as the CBN once again debited commercial banks’ accounts. Average interbank lending rates have since stabilized in 2015 and now hover between 12% and 14%.
Following the review of global and domestic economic trends, we anticipate the Monetary Policy Committee may likely make the following decisions:
· Retain Monetary Policy Rate (MPR) at 13% while leaving the +/-200basis points corridor unchanged: A hike in MPR is unlikely to sway foreign investors during this election period and in an environment of strengthening US Dollar. If anything, raising the MPR will undermine the central bank’s stated wish of increased lending to the private sector. In addition, inflation remains within the CBN’s target band, although upside risks to inflation exist in 2015. These include the increased spending in the run up to the February 14, 2015 general election and the pass-through effect of the Naira devaluation and its attendant impact on import prices.
· Retain the Cash Reserve Requirement (CRR) on private and public sector funds at 20% and 75%, respectively: Market liquidity concerns are likely to be tempered by frequent CBN interventions, particularly issuance of Open Market Operation (OMO) bills.
· Hold the Net Trading Position Limit at 0.1%: This will further help shore up the value of the Naira.
· Leave Liquidity Ratio unchanged at 30%.
· Maintain official naira exchange rate at a mid-point of N168/$ around the ±5% corridor.
· Additionally, we expect the Committee to extensively discuss the rising dollarization of deposits in the banking system.