Financial market operators in Nigeria are awaiting the decision of the Monetary Policy Committee (MPC) meeting, which will be announced today by its chairman, Godwin Emefiele, governor of the Central Bank of Nigeria (CBN).
The MPC, which decides the direction of the benchmark interest rate, commenced its meeting yesterday, Monday, but there is little or no expectation on easing or hike by experts and analysts in the financial market.
“We expect the Central Bank of Nigeria (CBN) to keep its Monetary Policy Rate on hold at 13.5 percent at its 26 November meeting,” Razia Khan, managing director, chief economist, Africa and Middle East Global Research, said.
October headline inflation rose to 11.6 percent year/year, likely driven by the impact of border closures on food prices. Recent pressure on Nigeria’s foreign exchange reserves – which the CBN attributes to the repayment of external obligations by the banking sector – is also likely to keep the central bank cautious, she said.
Nigeria’s external reserves declined by 11.52 percent to a five-month low of $39.95 billion as at November 21, 2019 from a peak of $45.15 billion as at July 5, 2019, data from CBN indicated.
While the CBN still wants to see a rise in private-sector credit, it will continue to rely on unconventional measures to boost bank lending. The minimum LDR (loan-to-deposit ratio) for the banking sector has already been raised to a targeted 65 percent at the end of December 2019, from an initial target of 60 percent at end-September 2019.
“We think the CBN could raise it further, setting a minimum LDR target of 70 percent for 2020. A punitive unremunerated 50 percent cash reserve ratio (CRR) will apply to banks that fail to comply with this target. While private-sector credit growth is expected to rise, the more punitive CRR, which will mop up liquidity more cheaply, will help to limit the cost of the CBN’s OMO issuance,” Khan said in a report made available to BusinessDay.
Analysts at Afrinvest Securities limited said they expect the outcome of the MPC meeting to guide market performance and anticipate an improvement in activity toward the end of the week. The CBN’s bet of a 65 percent loan-to-deposit ratio for commercial banks to boost lending may be paying off following the modest improvement in economic activities, but it has a tougher headache to worry, which is higher inflation.
Nigeria’s economy expanded 2.28 percent in the third quarter of the year with improvements seen in telecommunications and manufacturing, putting the 11-man MPC in a comfortable situation when it meets today to determine the direction of the flow of credit in the economy.
On the other hand, the prices at which goods and services are sold in the economy have skyrocketed following the shutting of the land borders by the Federal Government in order, ostensibly, to curb the smuggling.
“I expect the MPC to maintain the status quo as I do not see any reason to make the cut or increase the rates or even increase in the wake of higher inflation,” said Ayodeji Ebo, managing director/CEO, Afrinvest Securities Limited.
The decision to “hold”, “cut” or “raise” the rates could come with a lot of implications for a fragile economy still growing below the population rate.
Increasing the benchmark interest rate would help in controlling spiralling inflation which analysts bet would reach as high as 12.5 percent, to be driven by higher food prices from the yuletide season. This would help in putting a smile on investors’ faces as the high inflation that has eroded returns on investment. At 11.61 percent, the real yield in investing in one-year treasury bills stands at -1 percent.
On the flip side, increasing the rates would further shrink the ailing economy and will increase further the cost of funds, cutting short the lending improvements seen by the commercial banks to meet the 65 percent LDR by December.
Since its unexpected cut in the repo rate in March from 14 percent, a rate it held for over three years, to 13.5 percent, the CBN has maintained all parameters including the CRR at 22.5 percent, Liquidity Ratio at 30 percent and asymmetric window at +200 and -500 basis points around the MPR.
This week, analysts expect a quiet session ahead of the Primary Market Auction (PMA) on Wednesday where NT-Bills maturities worth N150.6 billion will be rolled over and issued across the 91-day (N24.4bn), 182-day (N23.2bn) and 364-day (N103.1bn).
HOPE MOSES-ASHIKE & MICHAEL ANI
