Will MPC Ease its current Contractionary Stance?


Friday 20 November, 2015, 04:23PM /DLM Research

Ahead of the next meeting of the Monetary Policy Committee (MPC), we are of the opinion that the body is likely to ease its contractionary stance; albeit slightly through a reduction in MPR.

In our outlook, we anticipate a 50-to-100bps reduction in the monetary policy rate (MPR). We believe that current economic realities support the need for monetary policy to aid the consolidation of a positive and stable macro environment conducive for growth, which is consistent with our position.

Following the shift in policy stance in 4Q 2010, we have consistently argued that a high interest rate regime reduces the availability of funds to the real sector which is supposed to drive economic growth.

We uphold our stance that fiscal and monetary policies should be supportive of stronger sustainable economic growth in the medium to long term.

Hence, we are optimistic that there will be a possible reversal in the policy stance in the forthcoming meeting, given the MPC’s current “neutral” position, the reaction of the financial markets and the fragile domestic national output growth.

At the last MPC meeting in September 2015, the committee re-assessed monetary policy options with underlying weak economic fundamentals, particularly the slowing domestic output, rising unemployment, market liquidity conditions, evolving international economic environment amongst others being major concerns.

Consequently, the committee decided to retain the MPR at 13 percent with a corridor of +/- 200 basis points around the midpoint, reduce the cash reserve ratio to 25 percent and maintain the liquidity ratio at 30 percent.

Mild inflationary pressures observed amidst fragile growth. The nation’s gross domestic product grew by 2.84% y/y in 3Q155, down from 6.23% recorded in 3Q14 but 49bps higher than 2.35% posted in the preceding quarter – which although increases optimism, highlights that growth remains fragile.

Meanwhile, headline inflation for October 2015 came in at 9.30 percent, representing a decline of 10bps from 9.40 percent recorded in the preceding month. The y/y decline which represented the first in 11 months was driven by lower increases in the food and core sub-indices.

Over the last two months, the exchange rate of the domestic currency remained flat N199.10/$1 at the interbank market while the Bureau de change (BDC) segment of the market recorded a depreciation of 4.30% to N232.70/$1 during the period on the back of increased demand spurred by the central bank’s foreign exchange administrative measures.

In addition, we highlight that the marginal improvement of 0.53% in reserves to its current level of $30.35billion from $30.19billion as at the end of October 2015.

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