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| CBN Governor, Mallam Sanusi Lamido Sanusi |
… As analysts differ on monetary policy targets
As the Monetary Policy Committee (MPC) meeting comes to an end today in Abuja, analysts sharply divided on the likelihood of the Central Bank of Nigeria (CBN) altering the Monetary Policy Rate (MPR). This is against the backdrop of the current inflation rate, falling naira and dwindling revenue from oil.
The MPR has remained un-changed at 12 per cent for nine consecutive times since October 2011. According to Razia Khan, Regional Head of Research, Africa at Standard Bank, while the Monetary Policy Committee of the CBN would continue to retain the benchmark Monetary Policy Rate (MPR) at 12 per cent this year, it may rise to 14 per cent next year, just as the Consumer Price Index which stood at 12.2 per cent last year, is forecast to close 2013 at 9.2 per cent, before rising to 11.0 per cent by 2014.
According to Khan, “we expect inflation to remain in single digits until the end of 2013, allowing the Monetary Policy Rate (MPR) to remain unchanged at 12 per cent this year.
Although many had predicted a greater risk of easing following the achievement of single-digit inflation, recent pressure on the Nigerian Naira– given market expectations of a tapering of QE (Quantitative Easing in the U.S.) – as well as concern about Nigeria’s political cycle and spending pressures, will likely keep the monetary policy committee on hold.
The situation, Standard Chartered Bank said, is worsened by the weakening oil output relative to ambitious budget targets, especially as the Federal Government repeatedly dips into the excess crude reserves for help.
“With only modest spending increases envisaged in 2013, a budget deficit of 2.17 per cent was initially forecast. However, oil production, reportedly averaging 2.1 to 2.2 million barrels per day (mmbd), has fallen short of the 2.53mmbd assumed in the 2013 budget.?“In June, output may have hit a low of 1.9mmbd.
This has necessitated more frequent augmentation of revenue from Nigeria’s Excess Crude Account (ECA), the “unallocated” earnings belonging to the three tiers of the Federation. Dipping into oil savings to finance spending may result in a narrower budget deficit for 2013,” the report added.
Contrary to expectation, Consolidated Discount House Limited (CDL) report tagged: Inflation in June 2013 & Pre-MPC Review, the benign inflationary outlook early in the year had led to dovish expectations of a cut in rates later in the year, stating however, that as the headwinds against the naira and output leakages increase, the CBN has maintained a more hawkish posture in recent times.
On the likely MPC outcome, CDL researchers said despite the significant pressures on the naira and other variables, there may not be a hike in the benchmark rate at this month meeting, stating that raising the rates now will throw up the earlier observations on real sector financing.
“We expect the committee to maintain the MPR at 12 per cent and the corridor at +/-200bp. At the May meeting, the committee uncharacteristically raised concerns over the low level of credit growth to the private sector and traced this to the crowding out effect of high growth in credit to the public sector.
Raising the benchmark rate now would be counterproductive to this concern since the MPR has far reaching consequences on market rates. However, we see the MPR exploring other policy options to increase the stability of the local currency.
We believe that if staff forecasts and outlook turn out to be persuasive enough to warrant further tightening, the committee may tilt towards adjusting the Cash Reserve Ratio (CRR) which is currently at 12 per cent. We also anticipate that the bank may be induced to synchronise the midpoint of its +/-3 per cent FX band from the current N155 to the N160 level s of the 2013 FGN fiscal budget assumptions.
The mid-point of the local currency was adjusted downwards from N150 to N155 in September 2010 when the naira faced similar pressures.” On naira, CDL said the currency is strongest when the price of crude is on the upward trajectory and vice versa, stating that overall, the fragility of the global economy at this time increases the its vulnerability to external threats.
On her part, Renaissance Capital’s Sub-Saharan Africa Economist Yvonne Mhango, believed the modest decline in the inflation rate is not significant enough to sway the CBN from maintaining its grip on monetary rates due to the present challenges to the naira and the feverish preparation for the 2015 general elections.
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