An interest rate cut is probably on the cards for Nigeria’s Monetary Policy Committee (MPC), in the first quarter of 2018, according to Moscow-based investment firm, Renaissance Capital.
The Central bank has left key interest rate at a record high 14 percent in its last five meetings, to fight inflation and buttress its currency even as the economy recovers from the biggest slump in 25 years.
The MPC is scheduled to meet on the 20th and 21st of November 2017 (last meeting for the year 2017).
Meanwhile, inflation cooled for the eight straight month in October, sliding marginally to 15.91 percent from 15.98 the previous month, the National Bureau of Statistics said Wednesday. It was higher than Rencap’s estimate of 14 percent.
On the back of falling inflation, “We think the committee may start cutting the policy rate at the March 2018 meeting by 1 percentage point,” said Yvonne Mhango, sub-Saharan Africa economist at Renaissance Capital.
“Additional arguments in favour of looser policy are: inflation is not demand driven; we see non-food inflation slowing to 10-11 percent in the first quarter of 2018; and we think FX stability can be sustained in the short term.
“In all, we think a 2-percentage point rate cut is likely in 2018. We believe this will complement the authorities’ efforts to lower interest rates on treasury securities, by raising the foreign debt share in public debt,” Mhango said in a Nov. 15 note to clients.
Mhango however identified low oil price and production as potential risks to a rate cut.
Oil prices fell 0.24 percent to $62 per barrel, Wednesday, according to data obtained from the Bloomberg terminal. Production was up some 10 percent to 1.8 million barrels daily in September, according to OPEC, as output recovers from as low as 1.2 million barrels daily last year. The rally has boosted the country’s external reserves to about $33 billion.
Godwin Emefiele, the CBN governor, said at the last meeting that the committee would observe various economic indicators – including growth, budget implementation in order to curb inflation, make naira attractive, increase foreign direct investment (FDI), and also help bleeding external reserves.
Although still fragile, Nigeria expanded 0.55 percent in the second quarter, while a new window created in April has boosted foreign exchange liquidity and helped the naira stabilise against the dollar.
Dolapo Asiru CEO CLG Securities Limited while reacting to the forthcoming CBN meeting said he foresees a “do-nothing meeting” next week Monday, although he admitted that all indication shows the interest rate will come down in the first quarter of 2018.
On the implication of a rate cut next year, Asiru said “Banks will gradually embrace the fact that the case of high interest income is coming to a close; banks will start doing proper lending rather than investing on Treasury bills.”
The rate of inflation in Nigeria declined for eight consecutive months in October, making it the lowest recorded for the year compared to its highest rate of 18.72 percent in January.
The Inflation rate slowed to 15.91 percent from 15.98 percent recorded in September which is in line with the consensus forecast of 12 economists polled by Bloomberg.
The rate however remains higher than the CBN preferred band of between 6-9 percent.
Nigeria targets an inflation rate of 12.92 percent in its 2017 budget, while a 12.4 percent target was set for 2018.
Aderonke Akinsola, an analyst at Lagos-based Chapel Hill Denham, said “that the inflation can be attributed to the slower pace of decline in core inflation to the 9.8 percent and 1.0 percent monthly increase in diesel and PMS prices in October.
“It is worth emphasising that diesel prices rose for the first time in 7 months in October,” Akinsola said in a Nov. 15 note to clients.
“There is expectation for inflation to sustain its downward trend in the coming months as the pass-through from improved FX liquidity will likely bring further slowing in core-related prices,” Akinsola added.
The level of banking system liquidity and primary market auction results will continue to determine the direction of secondary market yields amid lower inflation.
The stop rates on the 91-day and 182-day treasury bills fell by 10 basis points and three basis points respectively at Wednesday’s auction.
At the secondary market, the average T-bill yield declined by 4bps to 15.71 percent while average bond yield also shed five basis points in early trades.
Analysts say they expect investors to further price secondary market yields in line with the drop in stop rates in yesterday’s auction.
Also, the FG’s planned gravitation towards external borrowing, suggests further moderation of the naira yield curve in the near to medium term.
LOLADE AKINMURELE, ENDURANCE OKAFOR, DIPO OLADEHINDE, BUNMI BAILEY & MICHAEL ANI
