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Little impact seen in last MPC meeting before May 29 handover

By BusinessNews Staff on May 14, 2015

Holding just a few days from a crucial May 29 government handover date, Nigeria’s Monetary Policy Committee (MPC) meeting may have little or no significant effect on the markets , according to analyst opinions polled by BusinessDay.

The meeting is scheduled for May 18 and 19 next week, and analysts say it will be “politically inexpedient to make any significant [policy] adjustment” at this time.

At best, one of three probable scenarios could play out, according to Bismarck Rewane, economist and CEO of Lagos-based Financial Derivatives Company (FDC):

The Committee could decide to “Do nothing; adjust only the cash reserve ratio (CRR); or adjust only the monetary policy rate (MPR).”

There is a 70 percent probability of a “do nothing” scenario, Rewane said while addressing CEOs at the monthly breakfast meeting of the Lagos Business School on May 6.

In other words, the Committee is largely expected to retain the MPR at 13 percent; CRR on private sector funds at 20 percent and CRR on public sector funds at 75 percent.

The MPC took these decisions in the wake of the foreign exchange market pressures in November 2014, and has since then maintained the status quo in this year’s January and March meetings.

Leading investment bank, FBN Capital, quoted MPC members in March 2015, reasoning that the committee needed to wait for the “political noise” to dissipate and the impact of earlier policy actions were yet to be fully assessed.

Rewane says retaining the policy rate at 13 percent could keep the relative stability being experienced in the exchange rate market and further slowdown the depletion rate of the country’s external reserves, barring any sharp fall in oil prices.

After two rounds of devaluation and the shift from the official auction window to the interbank foreign exchange market, the naira has found relative calm at about N197 to the US dollar.

The external reserves have also declined by less than one percent since falling below US$30 billion in mid-March 2015.

There is also a 20 percent chance that the MPC could reduce the CRR on public sector deposits to 50% and that of private sector deposits to 15%.

Deposits in banks were firmly controlled by the CRR instrument to avoid public deposits being diverted to electioneering and speculative forex purposes, earlier in the year.

Rewane explains that a rationale for the MPC to reduce the CRR would be in a bid to test the efficacy of the instrument to manage money supply.

So far in 2015, money supply has risen 14 percent to N19 trillion up to March, and reduction in the CRR would have the likely impact of further increasing banking sector liquidity.

A less likely scenario (10 percent probability), according to Rewane, is for the MPR to drop to 12 percent from the current 13 percent.

But Nigeria could run the risk of reversing much needed investment flows into the country, as international capital seeks higher returns in other emerging and frontier markets.

Renewed exchange rate pressures and inflationary pressures could also emerge as consumers shift from savings to consumption.

While the rationale for such a move would be to boost economic growth through likely cheaper borrowing costs to the real sector; the attendant risks make it a path less trodden for the Committee.

[Business Day]

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