CBN to hold rate at 13% say Economists surveyed by Capital Markets in Africa

Lagos, Nigeria (Capital Markets in Africa) — The Nigerian Monetary Policy Committee (MPC) will be meeting between 23rd and 24th July 2015 to review developments in the global and domestic economic environment since its last meeting held on 18th and 19th May, 2015 resolved to reatian the rates at 135 and harmonised both the private sector and public sector cash reserve requirements (CRR) at 31 per cent, with aim to inject some liquidity back into the banking system. The meeting is coming against the continuous pressure on foreign reserves (to sustain naira), increasing inflation and slowing GDP growth. This is further compounded by global economic fragility amid heightened expectation of a US Fed rate hike and the Greek debt crisis. Therefore, one of the main tasks for the MPC would be to devise alternative methods to stabilize FX without depleting the external reserves. In order to gauge the market expectation, Capital Markets in Africa surveyed Nigeria-focused economists. The results of the survey revealed that the market expects the MPC to hold the monetary rate at 13.00%.  Some of the reasons for this are:

  • The need to balance growth and price stability remains imperative for the CBN as the challenges to growth and inflation are largely supply induced: exchange rate pass-through and tighter fuel supplies. The demand side has been tempered by lower oil revenues and reduced real incomes – thus, there is little need to tighten in a hurry. However, the level of liquidity would require more OMO sales by the CBN says Pabina Yinkere, Head, Research at Vetiva Capital Management, Nigeria
  • I think that raising the rate is probably inevitable, but the CBN will hold out until the naira weakens and/or US rates begin to rise. A higher rate would help to contain inflation, and stabilise the naira a bit, but would also act as a weight on economic growth; and the economy is still quite fragile. I am expecting the key rate to rise to about 15.00% by the turn of the year, says John Ashbourne, Sub-saharan Africa Economist, Capital Economics. 
  • Analysts from Afrinvest West Africa, painted the MPC decision in the following possible scenarios:
    • Leave all policy rates unchanged and continue to adopt administrative measures to curb Naira volatility while rebuilding external reserves with a 70.0% probability.
    • Increase the Naira intervention rate in the Interbank market and raise Cash Reserve Requirements (CRR) to 35.0% to reduce Naira liquidity that could spur FX speculation. The likelihood for this is placed at 20.00%, and
    • Increase MPR by 50bps to attract Foreign Portfolio Investment (FPI) while subsequently loosening restrictions on FX trading with 10.00% probability.

Goldman Sachs analyst JF Ruhashyankiko however, says a 100 basis points rate increase to 14.00% is needed “to reinstate a consistency between the stability of the naira and the fight against inflation.”

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