MPC may tighten to avoid prolonged negative real return

Proshare

Monday, April 18, 2016 2.22PM / Cordros Capital

With the record high March inflation still in the burner, and April reading unlikely to offer any respite, investors would have to remain in uncertainty till May when the Monetary Policy Committee (MPC) meets again to decide the next line of policy response.

Last month, the surprising spike in February's headline inflation climbing 176bps, and even rising above the benchmark rate, forced the Committee into reversing policy stance. We view the primary reason (that rates were tightened to directly stabilize speculative pressure on the NGN and indirectly ease inflationary pressure) the MPC offered to market observers for its action as cosmetic. Rather, what we think was substantive was the Committee's anticipation of further uptick in March inflation and the need to act, to prevent a prolonged situation of negative real interest rates.

Furthermore, the latest (March) inflation report, which was also surprisingly high (100bps above Bloomberg consensus), no doubt, comes as an additional pressure to the Committee and should serve as a test to the rationale behind last month's policy decision.

At its current level, the monetary policy rate is already in isolation from headline inflation, and given the likelihood for further uptick in inflation (thus extending real interest rates deeper into negative territory); we expect the Committee tightening once again, to maintain the rationale of the recent hawkish episode.

Given the state of Nigeria's economy (wherein virtually all economic performance indicators point southward), last month, the MPC appeared to concede that its approach to growth stimulation was largely ineffective.

Although risk to the necessary fiscal support increases with each passing delay of the budget passage, chances that the Committee would introduce a policy in favour of growth in May is highly limited.

While controversy over the State budget lingers, President Buhari, alongside Governor Emefiele, was in China this week to discuss bilateral trade agreements. With insight into the trade agreements limited by details, making headlines are (1) a US$6 billion infrastructure loan extended by the Chinese government (2) a bilateral currency swap deal; and (3) the substitution of yuan renminbi in Nigeria's forex reserves mix.

Having the yuan mixed in the domestic forex reserves was an option former CBN Governor Sanusi thought plausible in 2011, but for some unclear reasons -- possibly because crude oil price was still in the comfort zone -- it never made it to the Chinese government house.



Related News

1.      Worsening of the IMF's global outlook

2.      Total IGR for States Drops from N707.8bn in 2014 to N683.6bn in 2015

3.      More Shocking Inflation Numbers; Steep Increases for both Core and Food Measures

4.      Total Banks' Credits Rise from N8.6tr in 2010 to N12.9tr in 2015 - NBS

5.      Headline inflation spikes into record territory at 12.8%

6.      CPI Rises to 12.8% in March; 1.4% Higher Than February Rate

7.      Nigeria's Finance Minister lays out economic plans of the PMB Government

8.      CBN Publishes Nigerian Treasury Bills Issue Programme for Q2 2016

9.      MPC adopts Lame Duck Approach at its January Meeting

10.  No Change in Status Quo - MPC Committee Decision

11.  Pre-MPC Meeting: Is devaluation really the issue?

12.  COT Returns as a Phoenix

Related News
Proshare is Nigeria’s Premier Financial, Business and Economic Information Hub (since 2006)
Registered Office: Plot 590B, Lekan Asuni Close, Omole Phase II, Isheri LGA, P.O. Box 18782, Ikeja, Lagos, Nigeria. Telephone: 0700 PROSHARE (070077674273)
Some of our Trademarks are: WebTV, TheAnalyst, Proshare, Personal Finance, The Nigerian Capital Market Reports, Money Africa, The Nigerian Investor, Making Money in the Nigerian Capital Market, Investor Relations Service, Proshare Investment Clubs, Evaluating your Financial Health, Becoming your own Stock Analyst
Proshare - Facebook Proshare - Twitter
SCROLL TO TOP