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The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will hold its last meeting for the year between the 21th and 22th of November 2018 with analysts predicting that the committee will leave rate unchanged at 14 per cent.
The committee is expected to deliberate on the decline in oil prices, further rate hikes in the US, the prospective increase in minimum wage to N30,000/month, higher inflation rates, continued portfolio outflows and increasing political uncertainty ahead of the 2019 general elections.
Analyst at FSDH said although the committee has become increasingly disposed to tightening rates in its last two meetings, they believe the committee will retain the benchmark rate at 14.0 per cent to minimise the downside risks to growth and inflation.
They said: “We believe the MPC will maintain status quo on all policy rates – Monetary Policy Rate (MPR) at 14.0%, Cash Reserve Ratio (CRR) at 22.5%, Liquidity Ratio at 30.0% and Asymmetric Window at +200 and -500bps around the MPR.
“We believe the MPR will be kept at 14.0% to maintain the delicate balance between the downside risks to inflation, investment outflows and growth. Given that risks to inflation remain moderate and concentrated on the supply side, increasing interest rate will be ineffective to curb inflation.”
They also argued that from the perspective of growth, there is also need to support the economy by avoiding any further increases to the cost of borrowing given currently high rates.
“To attract and retain capital flows, we expect the CBN to continue utilising other monetary policy tools, such as Open Market Operations (OMO), to guide interest rate movement in a way that compensates investors for a higher risk premium,” they stated.
Some of the global developments that impact the MPC decisions includes the fact that oil prices slumped below US$70.00/b in November 2018 due to higher supply and moderating global growth prospects.
Specifically, the US, Russia and Saudi Arabia have increased production volumes, while the anticipated reduction in Iranian output has been delayed due to waivers granted to some importers of Iranian oil by the US.
The analysts believe that the reduction in oil prices could put slight pressure on Nigeria’s current account balance, the external reserves and exchange rate.
“Since the last MPC meeting, the reserves have reduced by US$2.9bn to US$41.6bn due to CBN’s intervention in currency markets in a bid to maintain exchange rate stability.
“We expect that the reserves will come under more pressure if oil prices remain below US$70.00/b for a sustained period and investment outflows heighten ahead of elections,” they said.
However, “we note that the external balances will continue to be helped by stable oil production at 2.1mb/d, steady remittance flows and the recently issued US$2.9bn Eurobond.
“Also, if the Organisation of Petroleum Exporting Countries (OPEC) and Russia agree to a cut of 1.0mb/d in oil production, which is currently being considered, oil prices will be boosted. Thus, we expect the exchange rate to remain stable at current levels for the rest of 2018,” the analyst added.
They also expect that inflationary risks will remain a prominent concern during the meeting due to the likely increase in minimum wage, expected capital releases resulting from the latest Eurobond issuance and election spending as campaigns start on 18th November.
In the analysts’ opinion, although the Federal Government is expected to meet its own obligations, the implementation of the minimum wage will suffer across states due to poor revenues.
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