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Time for a Policy Change?

Proshare

Tuesday, May 23, 2017 9:05 AM / FSDH Research

We expect the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to hold rates at the current levels when the Committee meets on May 22 and 23, 2017.

Although th e current growth rates in monetary aggregates are below CBN’s targets (which should justify an expansionary monetary policy), more stability in the foreign exchange market and lower inflation rate are necessary conditions for a policy change.

At its March 2017 meeting, the MPC maintained the Monetary Policy Rate (MPR) at 14%, with the asymmetric corridor at +200 and -700 basis points; retained the Cash Reserve Requirement (CRR) and Liquidity Ratio (LR) at 22.50% and 30% respectively.

Meanwhile, the Federal Open Market Committee (FOMC) of the United States (U.S) Federal Reserve (The Fed) maintained the Federal Funds Rate (The Fed Rate) at a range of 0.75% - 1.00% during its May 2017 meeting.

There are expectations that the FOMC will further raise the Fed Rate in 2017 and this may lead to an increase in global yields which may have adverse effects on Nigeria. The current average crude oil price is above US$50/b and may remain in that region in the short–term.

This is because of the ongoing discussion among the Organization of the Petroleum Exporting Countries (OPEC) and Non-OPEC to extend the oil output cut from June 30, 2017 to March 2018. This extension will have a positive impact on oil revenue for the Federal Government of Nigeria (FGN) but may place additional pressure on the pump price of Premium Motor Spirit (PMS) which may lead to higher inflation rate.

The current tight policy of the CBN in the foreign exchange market needs to be sustained in order to bring about stability in the market. Any premature change may erode the gains that the policy has recorded so far. The inflation rate (Year-on-Year) dropped to 17.24% in April 2017, from 17.26% in March 2017.

The fall in the inflation rate was mainly on account of base effect of last year’s increase in the Consumer Price Index (CPI) and the stabilising effects of the foreign exchange rate. Although we expect the inflation rate to trend downwards for the rest of 2017, the level of the decline will depend on Government’s decision on PMS price and electricity tariff. Our analysis shows that these prices may increase soon.

The CBN’s tight monetary policy stance aimed at taming high inflation rate and reducing the demand pressure in the foreign exchange market, has resulted in high yields on the Nigerian Treasury Bills (NTBs).

However, of all the FGN fixed income securities, only the 182- day and the 364- day NTBs trade at real positive yields at the moment. The monetary aggregates in Nigeria as at March 2017 show that the annualised growth rates in the money supply are below the targets the CBN stipulates for the year 2017. The broad money supply (M2) declined by 7.17% in Q1 2017, lower than the provisional growth benchmark rate of 10.29% for 2017.

Net Domestic Credit (NDC) increased marginally by 1.17% in Q1 2017, representing an annualised growth rate of 4.70% but significantly lower than the growth rate target of 17.93% for 2017.

The credit to government increased by 8.17% in Q1 2017, representing an annualised growth rate of 32.68%, marginally lower than the target growth rate of 33.12% for the year 2017.

However, expansionary monetary policy will be required when there is stability in the foreign exchange market and the inflation rate is moderated. Looking at the economic developments in Nigeria and the impact of external developments on the Nigerian economy, we expect the MPC to hold rates at the current levels.

A change in the monetary policy stance that results in lower rates may be counterproductive to address the current high inflation rate. An expansionary monetary policy stance at this time may not also support a stable foreign exchange rate. The Nigerian economy should follow a sustainable path to recovery, with appropriate fiscal policy implementation.


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