Friday, July 24, 2015 4:24 PM / CardinalStone Research
Policy rates unchanged
With Nigeria's financial markets sitting on the edge in recent weeks largely on the back of the consistent depreciation in the currency (parallel market), investors looked to this Monetary Policy Committee (MPC) meeting to: (i) provide some guidance on the near term outlook for prices (interest rate and inflation) given the challenging macro backdrop and more importantly to, (ii) provide clarity on the Central Bank's view on the exchange rate. At this month's Monetary Policy Committee (MPC) meeting, members voted by a majority to keep the benchmark interest rate (MPR) unchanged at 13%, with the Liquidity Ratio (LR) at 30%, in line with our expectations. In addition, the symmetric corridor around the MPR was retained at +/- 200bps. The Cash Reserve Requirement (CRR) was retained at 31%.
Governor's statement: Oil price and inflation in focus
The Governor's statement highlighted three credible threats to price stability - (i) challenging lower-for-longer oil price scenario, (ii) normalization of global monetary policy, and (iii) creeping headline inflation on account of a weaker Naira and increased transportation costs. We sense that the Committee, whilst being aware of these risks, would be reluctant to pursue further tightening in the near term given the impact of the current policies on growth (Q1'2015 real GDP growth: 3.96% y/y) and especially as the Committee feels inflation pressures are transitory and are expected to ease due to the coming harvest as well as the recent improvement in electric supply which should lead to reduced energy costs. Once again, the Governor reiterated his position that monetary policy is almost at its limit in terms of policy arsenals, and called for fiscal and structural reforms to complement the Committee's effort to maintain price stability.
Not yet Uhuru for the Naira
There was no clear rhetoric around the current or future FX policy. In spite of the 6% MoM increase in FX reserves in the past month to US$30.7 billion which the Committee attributes to the blockage of leakages, we think the negative external backdrop remains a challenge to the CBN's ability to intervene and defend the currency. We note that the implementation of the 'order-driven' FX market has been accompanied by further restrictions on the foreign exchange market which has reduced liquidity and inevitably created a wide premium between the interbank and parallel market rates with implications for output and prices. Whilst the NGN/USD has been range-bound between 197 and 199 at the interbank FX market, the premium at the parallel market continues to hover NGN 40/USD. Nonetheless, the Committee appears confident that the external reserves will continue to climb, suggesting that a devaluation may not be in the works anytime soon.
READ THE CBN COMMUNIQUE HERE