Monetary Policy Rate Expectation: Likely To Remain On Hold

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Friday, May 15, 2015 12:55 PM / DLM Research


Background.
Nigeria’s Monetary Policy Committee (MPC) met in March 2015 to re-assess monetary policy options in the near term with inflationary pressures, weakening growth outlook on the back of lower oil prices, weak macro-economic indicators, depreciation of the naira and political risk being major concerns (fig.1).

Consequently, the committee unanimously decided to retain the MPR at 13 percent; Cash Reserve Ratio (CRR) on Private and public Sector deposits at 20 and 75 percent, respectively and the liquidity ratio at 30 percent in a bid to achieve full effect of previous policy measures implemented.

Over the last two months, the currency weakened by 0.26% from N198.58/$1 to N199.10/$1 as at 11th May 2015 at the interbank market while the Bureau de change (BDC) segment of the market recorded an appreciation of 2.21% to N221.00/$1 during the same period.

Though the closure of the RDAS/WDAS foreign exchange window at the CBN represented an implicit devaluation of the domestic currency, we are of the view that it offered some respite to the financial markets and has significantly slowed down the rate of depletion of reserves.
We highlight that the decline of c.3.27% in reserves over a 2-month period to its current level of $29.6billion from $30.6billion on the 9th of March 2015 is significantly lower than the rate of depletion of 13.12% seen between January and March 2015.

Rates likely to remain on hold...

We remain positive that inflationary pressures will persist in the short to medium term with seasonal adjustments, full lagged effect of the devaluation, pressures arising from the increase in electricity tariff expected to kick-off in the coming months, amongst other factors being key drivers.

Whilst we uphold our stance that fiscal and monetary policies should be supportive of stronger sustainable economic growth in the medium to long term, we are of the view that the prevailing economic realities is not fully supportive of a reduction in policy rate at this time.

Consequently, we are of the view that the CBN will keep monetary policy tight at the meeting slated for the coming week with interest rates retained at current levels in a bid to address inflationary and exchange rate stability concerns.

Overall, we re-iterate that economic stability in the short-to-medium term is hinged largely on concerted efforts from fiscal and monetary authorities in the months ahead as we expect additional adjustments - particularly on the fiscal side to enhance macro-economic stability.








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