Access Bank anticipates the MPC will retain the existing FX policy regime


 Friday, May 20, 2016 01:31 PM / The Access Bank Economic Intelligence Unit

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria will hold its two-day meeting on Monday and Tuesday May 23 and 24, 2016.

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will hold its 2-day meeting on the 23rd and 24th of May 2016 to decide monetary policy stance in the near-term. The meeting, which is the third for 2016, comes against the backdrop of slowing global growth and a weakening domestic economic environment. As usual the MPC will consider domestic and international economic and financial market conditions, with emphasis on information that has emerged since the March 22nd interest rate decision.

Global economic activity – particularly in advanced countries – has continued to moderate. In the US, activity data indicate a loss of momentum and a marked slowdown in the first quarter. US economic growth slowed to an annual pace of 0.5% during the first three months of the year, down from the 1.4% pace of growth seen in the fourth quarter last year. The Chinese economy grew at an annual rate of 6.7% in the first quarter of 2016, compared with 6.8% at the end of 2015.

The International Monetary Fund (IMF) revised its global growth forecasts for the second time this year in April, citing China's slowdown, persistently low oil prices and chronic weakness in advanced economies. The IMF now sees this year’s economic growth at 3.2% from a forecast of 3.4% in January. Growth of 3.5% is now projected for next year‚ 0.1 percentage points lower than the January forecast.

The main message from central banks worldwide remains dovish. At its April meeting, the US Federal Reserve kept interest rates between 0.25% and 0.5%, the rate it has held since December. Similarly, the European Central Bank (ECB) following its policy meeting in April reiterated that the central bank will maintain an accommodative monetary policy for an “extended time.”

Oil prices have recovered to a degree, reflecting a moderation in US crude stockpiles and supply losses in Canada and Nigeria which have whittled away the global excess. The price of a barrel of Bonny Light, Nigeria’a reference crude oil continued to increase this month, to around $47.85 as at May 17th. Uncertainties, however, remain and further bouts of volatility cannot be precluded.

Nigeria Macroeconomic Trends

On the domestic scene, the CBN’s deliberation will focus on a number of key macroeconomic variables namely;


Money market liquidity conditions were relatively tight during the month of May 2016 on account of the debit for the Asset Management Company of Nigeria (AMCON) sinking fund contribution by banks (0.5% of Total Assets). Consequently, Overnight (ON) and Open Buy Back (OBB) interbank interest rates spiked sharply to 11.17% and 10.58% on May 17th 2016 from an average of 6.51% and 5.97% respectively in March. Longer-dated instruments such as the 90-day Nigeria Interbank Offered Rates (NIBOR) also nudged higher to close at 11.17% on May 17th compared to an average of 10% in March.

Exchange Rate

While the interbank exchange rate has remained within a narrow band of around N197 - N199 to the dollar since February 2015, the naira weakened 3.7% to N335 to the dollar on the parallel market on May 17th from about N323 it traded in March. The depreciation at the parallel market came after the Federal Government announced a new fuel price regime and adjusted the price of petrol, from N86.50 to a band of N135 - N145. The revised framework for the provision of fuel supplies which permits oil importers to source foreign currency outside of the official window to finance their purchases, has intensified demand in the informal market, widening the gulf between the interbank and parallel exchange rates.

External Reserves

Nigeria’s foreign reserves plunged by 4.24% between the end of March and the 16th of May to settle at $26.68 billion, which is the lowest foreign reserve figure recorded by the Central Bank since July 2005. Pressure on the country’s foreign reserve coffers have persisted due to the increasing demand for imported items and a slump in foreign investment inflows. According to Nigerian Bureau of Statistics’ (NBS) Capital Importation report for the first quarter of 2016, the total value of capital imported into Nigeria in the first quarter of 2016 was $710.97 million, the lowest level since the series began in 2007. This represents a decline of 54.34% in the final quarter of 2015, and a year-on-year decline of 73.79%.


According to latest data release from the NBS, Nigeria’s real Gross Domestic Product (GDP) growth rate slowed to 2.11% in the fourth quarter of 2015 from 2.84% in the preceding quarter, and well below the 5.94% registered in Q4 2014. Growth over 2015 as a whole fell to 2.8% from 6.2% in 2014. Oil production fell to 2.16 million barrels a day from 2.17 million barrels in the third quarter. The oil industry contracted 8.28% in the three months through December compared with expansion of 1.1% in the previous quarter, the statistics office said. Growth in the non-oil industry, which accounts for 90% of GDP witnessed little change at 3.1%.


Annual inflation in Nigeria quickened to a near six-year high of 13.72% in April from 12.77% in March. According to the NBS, the higher inflation rate in April reflected increases across all sectors, with petrol prices and electricity tariffs major factors. The Bureau noted that the core index increased by 13.4% during the month, representing about 1.2 percentage points from rates recorded in March. Food prices, which account for the bulk of the inflation basket, rose 13.2% in April, up 0.4 percentage points from March.

Our Position

Following our analysis of international and domestic economic developments, we expect the MPC to reach the following decisions at the conclusion of its meeting:

1.       Raise Monetary Policy Rate (MPR) by 2 percentage points to 14%, leaving the asymmetric corridor of +200 basis points and -700 basis unchanged: This Committee is likely to adopt this measure in a bid to curb price growth and return real interest rates back to positive territory.

2.      Retain the Cash Reserve Requirement (CRR) at 22.5%.

3.      Retain Liquidity Ratio at 30%.

4.      We anticipate the Committee will retain the existing FX policy regime. We believe the recent directive of the government that marketers should now source their FX requirement for imports from autonomous sources will buy the Central Bank some time in maintaining the currency peg. In addition, the committee is likely to acknowledge that reforms on the administration side, such as the recent China deal, details of which have not fully been disclosed, will address FX supply constraints.


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