Interest rate hike likely if currency comes under pressure - BUSINESSDAY

AUGUST 09, 2018


There were projections and expectations of monetary policy easing this year by economists and analysts from the financial services sector, based on improving macroeconomic indicators.

Renaissance Capital analysts had projected a 2-ppt rate cut to 12.0 percent by year-end 2018. “We agree that the upside risks to inflation have increased, which implies that our projection of a 2-ppt rate cut to 12.0 percent by YE18 is unlikely. But as we expect the pick-up in inflation to be moderate, we do not foresee rate hikes from current levels. So, we revise our policy rate forecasts to 14.0 percent at YE18 and YE19, respectively, from 12.0 percent”, RenCap analysts said.

However, three of the 10 MPC members voted to hike the policy rate. Joseph Nnanna, deputy governor who spoke at a conference in Egypt, said the CBN was “in the mood” for tightening and will increase its main interest rate if inflation doesn’t slow.

In her emailed response to BusinessDay, Yvonne Mhango, head of Research, SSA Director, Sub-Saharan Africa Economist, said, “the comment was in keeping with the change in the tone of the MPC meeting statements and the voting patterns of MPC members.

“In July, we saw the minority view switch to hiking rates (from a cut), due to the building up of inflationary pressures. While we do agree that the upside risk to inflation has increases, we do not see them hiking in the short term, in part due to the risk of destabilising the fragile economic recovery. If the currency in particular were to come under pressure, then yes a hike is likely. However, this is not our base case view”, Mhango said.

The Monetary Policy Committee (MPC) at the end of its meeting in July retained the benchmark interest rate at 14 percent, with the asymmetric corridor at +200 and -500 basis points around the MPR; it retained the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) at 22.50 percent and 30 percent, respectively

Nigeria’s inflation rate year-on-year slowed marginally to 11.23 percent in June from 11.61 percent the previous month, but still remains well above the 6-9 percent preferred band.

The expectations of Godwin Emefiele, governor of the Central Bank of Nigeria (CBN) has been to see inflation rate drop to very low double digit or high single digit levels during the this year, barring any unforeseen shocks.

However, FSDH Research said attaining single digit inflation rate is now unlikely. The firm expects the inflation rate (year-on-year) to drop to 11.01 percent in July 2018 from 11.23 percent recorded in the month of June.

 The expected decrease in the inflation rate is largely attributable to the base effect of the previous year. The prevailing crisis in the food producing states in Nigeria is putting an upward pressure on food prices. This is a major risk to the achievement of a single digit inflation rate in 2018.

Nigeria’s GDP grew by 1.95 percent (year-on-year) in real terms in the first quarter of 2018. This shows a stronger growth when compared with the first quarter of 2017 which recorded a growth of –0.91 percent indicating an increase of 2.87 percent points. Compared to the preceding quarter, there was a decline of –0.16 percent points from 2.11 percent. Quarter on quarter, real GDP growth was –13.40 percent, according to the National Bureau of Statistics (NBS).

Exchange rate has been relatively stable as a result of increase in crude oil production and prices as well as sustained forex interventions by the CBN. Oil revenues still remain the country’s dominant source of income. The International Monetary Fund (IMF) had warned that Nigeria’s debt shift could create exchange rate risks.

External reserves which fell to a low of $23.9 billion in October 19, 2016 grew to $47.8 billion this year. However, The external reserves recorded persistent drawdown in July 2018. This was due to the foreign investors’ pull-back from the Nigerian market and the increase in demand at the foreign exchange market.


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