The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) on Tuesday, May 23rd, 2017 rounded up her third meeting of the year with the following decisions;
- Retained the Monetary Policy Rate (MPR) at 14.0%
- Maintained the Cash Reserve Ratio (CRR) at 22.5% 3)
- Retained the Liquidity Ratio (LR) at 30.0% and 4)
- Maintained the asymmetric window around the MPR at +200bps/-500bps.
Recall that in our Economic Brief on CPI April 2017, we anticipated that the MPC would maintain status quo on all rates as result of positive economic development in recent times and also to allow time for the implementation of 2017 Budget which was recently passed into law by the National Assembly. In opting to maintain the basic policy rates, the MPC granted our narrative.
Though, the MPC acknowledged the challenges that confronts the economy going forward such as;
- The continued negative growth in the economic space
- Expected low oil prices due to renewed investments in shale oil exploration and production
- Anticipated strengthening of the US dollar
- Continued high inflationary pressure
- Weak DMBs’ credit facility to the real sector and
- Yet to be diminished demand pressure in the FX market
but opted to consolidate on the recent positive development in the economy especially the FX policy that has seen the disparity between the official and parallel rates shelved by 11.48% as at May 23 rd compared to the last review date in March. The recent FX policy is designed to improve liquidity, confidence and stability of foreign exchange market. The steady decline in inflationary trend, now three months in a row, was graciously welcomed by the MPC. Recall that in our CPI April 2017 brief, we noted the reduced impact of core inflation on the headline due to lesser FX pressure. Notably, import bill dropped by 1.9% in April compared to 3.2% recorded in March.
…Dilemma of decisions
The MPC noted that further tightening of the MPR might induce an income gap, dampen aggregate consumption and adversely affect credit to the real sector of the economy. On the other hand, it noted that easing the policy rate could counter the gains made in the FX market by reopening the window for speculation and unattractive rate to investors.
Expected impact on investment environment and asset classes
…Stability on the Exchange rate would strengthen
The FX is expected to be a major winner. Given the CBN’s recent measure on the FX, retaining status quo is expected to provide good time for the policy to crystalize firmer in the market. Our argument here is based on the recent development witnessed thus far. Though, the structural and inflationary pressures could deter this objective. Again, with oil prices rebounding, the effect of defending the naira on the reserves will not be as severe.
…Productivity expected to track northward
In the recent release of the National Bureau of statistics (NBS), the economy showed a marginal budding to recover from recessionary trend. GDP contracted marginally by 0.52% in Q1 2017 compared to 2.06% and 1.30% recorded in Q3 and Q4 2016 respectively. This was a positive development and we may likely see a positive growth in Q2 2017 given that the executive authority work assiduously to implement the capital expenditure budget in line with the Economy Recovery and Growth Plan (ERGP).
…Inflation pressures could subside the more
With the headline inflation shifting backward for the third month in a row as result of lesser pressure on the FX and base effect, we expect a consolidation in the months ahead. This is hinged on the fast approaching harvest season.
…Commodity market could be aided
Given that a significant amount of commodities are imported, the exchange rate issues facing the country which is reflected in the commodity market would be moderated. Key imported commodities include wheat, raw sugar, barley, coffee, cocoa and palm oil. Even commodities that are locally produced have had their prices increased as producers try to make up for lost income in other items.
…Treasury bills yield likely to continue upward
The treasury bills market will continue to attract better interest. Being a short end of safe securities, the DMBs and other financial institutions will continue to play active roles here. The six months’ rates are currently trading on the average of 20%, which is currently above MPR rate.
…Fixed income expected to be mixed
With lesser inflation pressure, the new issues would be positively priced against existing policy rate. It would create investment attraction to fund managers such as Pension Fund Administrators (PFAs), portfolio managers etc. Activities in the market is expected to find stability as investors intermediates between new and old issues.
… Stock market likely to consolidate trend
The stock market has gained substantially from lesser pressure on the FX in recent time. We expect this to continue periodically and laced with profit taking correction. Meanwhile, much would be expected from the executive authority implementation of the ERGP. When the policies as stipulated in the document are implemented, the chances of positive catalyst that will drive the economy will be high. This is expected to rob off on the equity market.