ABUJA, JANUARY 24, 2017 – The Monetary Policy Committee (MPC) yesterday opened its first meeting for the year in Abuja and will be making key announcements when the meeting ends this afternoon.
Analysts at FBN Capital said the MPC could hike interest rate today in response to the surge in inflation, and need to encourage savings.
The last time the committee hiked by 200 basis points to 14 per cent was in July last year, which was an unsuccessful bid to attract departed offshore portfolio investors.
In an emailed report released yesterday, FBN Capital, an investment arm of FBN Holdings, said the committee was faced with an economy which has contracted year-on-year for three successive quarters and inflation which has accelerated for eleven months in a row on the same basis.
It said: “Gross Domestic Product (GDP) has gone into reverse due to the failure to diversify the economy and to the sabotage in the Niger Delta. Inflation has risen far above target due to supply-side factors. The MPC cannot be said to be the main culprit in either case although, along with the CBN, it has exchange-rate responsibilities and could have acted differently over the past 18 months.
“The MPC and Central Bank of Nigeria are looking to the fiscal side to lift the economy out of recession. “The Federal Government has adopted an expansionary fiscal stance, which in our view is the right decision while it waits for its reforms to have a broad impact and oil revenues to recover.”
Other analysts at Afrinvest West Africa Plc, believe the meeting will give MPC members the opportunity to take stock of the impacts of its tight policy regime and reflect on whether previously hiked interest rates helped inflation figures how responsive has portfolio capital been to the aggressive policy tightening which has resulted in a humped yield curve ostensibly guided to achieve positive short term real return.
It was further predicted that the committee may not implement any major shift in the management of the foreign exchange market but would rather assess the impact of 2016 policies on the economy.
Managing Director, Afrinvest West African Plc, Ike Chioke, said the MPC meeting is coming against the backdrop of tightening external market for trade and capital, underlined by the US Fed hike in interest rate last month and rise in fixed income yields, expected to subdue capital flows into emerging markets and developing countries this year.
He explained that while the uncertainties surrounding the implementation of Brexit remains a concern, the emergence of Donald Trump as President of the US and the possibilities of heightened geopolitical tensions and trade wars linger as markets await a clear fiscal and trade policy from Trump.
He said the challenges in the foreign exchange market persist as currency controls and forex rate peg continue to weigh on market liquidity whilst inflation has continued to rise largely as a result of the reforms in the energy sector and weaker exchange rate pass through on prices of imported goods.
The CBN would likely find itself in an awkward situation where inflation rate is moderating (due to high-base effect) but inflation expectation remains high and capital importation is sub-optimal due to parallel market guided forex rate expectation and interbank market illiquidity.
He thinks the approval of the Medium Term and Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP) with exchange rate projection of N305/$1 suggests that the controls in the forex market will persist in the short-term. Thus, it is expected that rate at the official market to remain at similar level in the week ahead whilst the parallel market remains pressured.
He said the fourth quarter 2016 Gross Domestic Product (GDP) data, due for release next month, is expected to show a further contraction in economic output dragged by below-trend oil production and weak productivity in the non-oil sector.
“Despite the instability in macroeconomic variables, we do not expect a tweak in policy rates this week given the limited scope for easing or tightening and reluctance of the CBN to shift forex rate peg.
However, subsequent meetings from March will be decisive as base-effect set in from February to moderate inflation rate, testing the resolve of the CBN to abide by the inflation-targeting thrust it committed to in 2016,” Chioke said.
