The return of easing in 2016


Wednesday, May 27, 2015 8:45 AM / FBN Capital Research 

Tightening to come in the US, far off in the Eurozone: Trends in the developed economies remain diverged. Following some poor data releases in the US for Q1, we now see the first hike in the Fed funds rate in September/October this year. In contrast, policy will remain accommodative in the Eurozone and Japan for at least two years, sustaining the carry trade.

One hike and then two cuts in the MPR: We see one rate hike this year from the MPC in defense of the exchange rate and the current inflation objective. Thereafter we expect a change in nuance in the committee. This will place a little less emphasis on inflation and a little more on the policy rate for its perceived impact on lending volumes and growth. This could bring two rate cuts of 100bps next year.

Inflation back over 10%: The lagged impact of the two devaluations and a likely deregulation of fuel prices will push up inflation to 10.5% at end-2016.

A little more flexibility over the exchange rate: We also see a change in nuance over the exchange rate towards a less managed regime, with interbank rates of N205 per US dollar at end-2015 and N220 at end-2016.

A feel-good factor for investors: The many challenges withstanding, investors have apparently bought into the pledge of greater fiscal discipline from the incoming administration.

Recommendation for investors: We see FGN bond yields within a range of 13.00% to 14.00% over the next quarter. We would favour the shorter end of the flattish curve. The principal risk to our analysis is a renewed fall in the oil price, which we think has reached its floor in this cycle.

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