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All eyes on CBN as MPC meeting ends Tuesday

By BusinessNews Staff on November 26, 2014

The 241st Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN), which ends today, will be the focus of investors, financial market analysts and bankers.

This all-important meeting, which comes up amid the downswing suffered by the naira that hit a record low of about N180 to a dollar at the interbank market last week, as well as outflow of foreign portfolio investment is expected to consider changes to interest rate and other monetary policy tools.

Although the naira has been depreciating in other segments of the forex markets, its decline at the regulated Retail Dutch Auction System (RDAS) in the past two weeks has heightened speculation that MPC may adjust the exchange rate band upward. The exchange rate band is presently at + or – N155/$.

In response to the increasing dollar demand, the CBN has sold approximately $6.1 billion at the official window within the last two months in addition to undisclosed amounts at the interbank market via ad-hoc interventions

The forex market has in the past two weeks, resisted various measures introduced by the central bank to control the exchange rate volatility.

More so, as the threat to price and macroeconomic stability becomes stronger, industry watchers would be eager to know the response of the 11 ‘wise men’ MPC (excluding Dr. Kingsley Moghalu whose tenure expired this month), to the challenge posed by the dwindling crude oil prices and revenue to the country.

The precarious situation in the economy last week forced fiscal reactions as a number of economic stabilisation measures were announced to shield the economy from exogenous shocks.

As part of the measures, the Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, had said the 2015-2017 Medium Term Expenditure Framework (MTEF), which was recently submitted to the National Assembly had been revised from a budget benchmark of $78 per barrel of oil for the 2015 budget, down to $73 per barrel. According to her, the measures are designed to boost non-oil revenues further, plug loopholes and wastage in the system as well as cut unnecessary expenditure in order to cope with the situation, which are scenario-based.

The slide in the prices of crude oil, the country’s major source of revenue has continued to rattle policy makers. The development was even worsened by production losses occasioned by shut-ins and shut-down of trunklines at various oil terminals, which also contributed to the drop in revenue.

But oil prices rose on Friday recording its first weekly gain in two months with benchmark Brent crude returning to above $80 a barrel due to a rally that was triggered by speculation of an Organisation of Petroleum Exporting Countries’ (OPEC) output cut.

Nevertheless, though the consumer price index (CPI), which is used to gauge inflation in the country simmered down to 8.1 per cent in October, from 8.3 per cent in September, the increased terrorism as a result of activities the Boko Haram sect and anticipated disbursement of funds to finance campaign projects as the 2015 elections draw nearer, have been identified as some factors that would heighten inflationary pressure in the short-term.

Also, Nigeria’s external reserves, which is derived majorly from crude oil revenue fell by $8.295 billion or 18.5 per cent to $36.541 billion on November 14, compared to the $44.836 billion it stood on September 19, when the last MPC meeting was held.
In addition, the recent conclusion of the United States Federal Reserve $4.5 trillion bond-buying programme, a radical monetary policy it had introduced nearly six years ago to steer the country’s economy, experts have argued has also created significant capital flow reversals from the country.

To this end, analysts at BGL Securities Limited argued that with the exchange rate pressure, retaining interest rate is not an option.
They stressed that the dawn of the much expected oil price shock and the consequent exchange rate and assets prices volatility in the last one month demand major monetary action to moderate if not stemmed.

“We opined that giving the naira exchange rate a breather along the line of wider acceptable volatility band and/or official shifting of the midpoint to a higher level appears to be the most viable option alongside some semblance of further tightening via possible increase in private sector Cash Reserves Ratio (CRR),” they added.

According to BGL Securities analysts, the challenges in the economy portend threats to key economic fundamentals through the exchange rate and driven largely by the high hot monies in the economy.

“We expect the option of an increase in the benchmark interest rate with a combination of an asymmetric corridor to be high on the plate. “This could improve the attraction of Nigerian assets to foreign investors due to the consequent higher risk adjusted real return on Nigerian assets.

“Hence, a 50-100 basis points increase in the MPR is not unlikely alongside a possible removal of the lower corridor of the MPR while the upper corridor is retained.

“Another set of option is the possible devaluation of the naira by a shift in the exchange rate midpoint to N160/$1 and/or expansion of the band around the policy midpoint from +/- 3% to between +/- 5% to +/-10%.

“This move could be accompanied with a further increase in the CRR on private sector deposits to between 18-20 per cent to further reduce systemic liquidity,” it stated.

Also, analysts at Afrinvest West Africa Limited anticipates that the MPC would design strategies that deliver short, medium and long term solutions to the deteriorating macroeconomic outlook.

They also noted that the MPC would be required to take an active role, designing long term strategies that actively contribute to economic development and support the diversification agenda of the federal government.

“We expect the retention of the current 12 per cent and 75 per cent MPR and CRR on public sector deposits, however a mild increase in the CRR on private sector deposits may be considered.

“On the forex side, the MPC may opt for a subtle extension of the mid-point at the official forex window to ease the pressure of fiscal buffers,” they predicted.

In the same vein, the Financial Derivatives Company Limited noted in a report that although “the federal government has taken the first step in the right direction,” with the recent measures it announced, “a blend of fiscal, structural and monetary policy adjustments are required to effectively mitigate the dire effects on the Nigerian macro-economy.”

[ThisDay]

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