Monetary Policy Committee may raise benchmark rates by 25-50 bps

COST analysts expect the Monetary Policy Committee (MPC) to raise the nation�s benchmark interest rate by at least another 25 basis points from 6.5 percent, in a move to frontload monetary tightening as government spending continues to rise.

Downward pressure on the naira ahead of elections next month, along with this week�s announcement of higher-than-anticipated 2011 budget, suggest the committee may start raising rates more aggressively, analysts say.

The naira has edged down to its weakest for around 18 months in recent days, as businesses and rich Nigerians buy dollars to hedge against the risk of any prolonged political upheaval triggered by the polls.

“A tightening in monetary policy would help curtail liquidity and speculative demand for dollars as well as increase the incentive to hold a naira position,” said Samir Gadio, emerging markets strategist at Standard Bank.

Analysts said they would be watching to see whether the Central Bank of Nigeria (CBN) reiterated its commitment to maintain the naira in a band of +/- 3 percent around 150 to the U.S. dollar or whether it might be prepared to shift the corridor.

Parliament last Wednesday passed N4.972 trillion 2011 budget, increasing the spending plans from President Goodluck Jonathan�s initial proposal three months ago. More than half of the budget is for recurrent expenditure, undermining pledges to cut the cost of government.

The benchmark oil price in the spending plans was raised to $75 per barrel from $65, “With fiscal policy clearly still in expansionary mode, there will be an additional need for the frontloading of any planned monetary tightening,” said Razia Khan, head of Africa research at Standard Chartered.

“A 50 basis point hike in the MPR now looks much more probable — and appropriate — than the more gradualist move of 25 basis points (we had previously forecast), she said.

Central Bank Governor Lamido Sanusi told Reuters early this month he would keep tightening monetary policy in a “steady and stable” manner as government spending and the resolution of a banking crisis add to inflationary risks.

The Asset Management Corporation of Nigeria (AMCON), is on track to have bought more than N2 trillion worth of non-performing loans from the banking sector by the end of the month, further boosting liquidity.

“If we do think there is a long-term growth trend in money supply, which we have seen with huge fiscal deficits and with the possibilities of AMCON, tightening looks like the reasonable option,” Sanusi told Reuters on March 7.

Headline inflation eased to 11.1 percent year-on-year in February, but growth in food prices rose. The shambolic state of the nation�s oil refineries means the country relies on fuel imports despite being a major crude oil producer, heightening the risk of imported inflation with world oil prices rising.

Alan Cameron, sub-Saharan Africa analyst at Business Monitor International, said he expected further moves to curb liquidity such as an increase in the Cash Reserve Requirement from the current level of 2.0 percent.

“The bank will want to send a clear message about its commitment to fighting inflation, and doing so will require more than the symbolic rate hikes seen thus far,” he said.

“This is especially so given the recent run up in imported food and fuel prices, which has only strengthened the case for rate hikes.”

Source : Daily Champion