Monetary Authority Unfazed by Inflation Condition, Keeps Policy Rates
The monetary authority has remained unfazed by inflation condition in Nigeria as policymakers keep key rates at just concluded meeting, the decision which followed consensus analysts’ expectation.
Ahead of the meeting, a number of analysts polled by MarketForces Africa had predicted that the Central Bank of Nigeria will keep key rates steady, citing disinflation and positive GDP growth.
As projected, the Monetary Policy Committee (MPC) unanimously voted to hold all policy parameters constant at the end of its policy meeting on Tuesday, 25 May 2021.
This unanimous vote compares to the 66.7% vote favouring a hold recommendation in the March policy meeting and underscores concerns that the current economic growth remains very fragile.
For the next two months, the benchmark interest rate (MPR) would be maintained at 11.50% with asymmetric corridor remained at to +100/-700 basis points around the MPR. Also, the cash reserve ratio held at 27.50% while liquidity ratio for banking sector is retained at 30.00%.
Against the CBN’s target of 6-9%, inflation rate in the country has worsened despite a momentary drop recorded in April, which was primary driven by Ramadan period.
Headline inflation rate printed at 18.12% after it recorded a 5 basis point slide in April amidst worsening output level, steep unemployment condition.
Growth has a soft underbelly, analysts at CardinalStone said in a report predicting that the policy committee will hold key rates.
Nigeria’s gross domestic product (GDP) report for the first quarter (Q1) 2021 released on the eve of the third monetary policy committee meeting came weak.
Following prior guidance, analysts said that there would be an all-out attempt to combat price pressures if inflationary pressures continue and growth momentum improves.
NBS reported that inflation rate slides 5 basis points, while GDP growth came at 0.51%, the macro data which analysts believe set a stage for MPC to maintain status quo.
“Given the weak Q1-20221 growth (Bloomberg consensus expectation was 0.9%) and recent inflation moderation, we believe the committee will prefer to leave policy parameters unchanged at the end of its two-day meeting to ensure consistency with its guidance”, CardinalStone said.
However, analysts said the decision could be supported by plans to raise about $6.2 billion in foreign borrowings and boost remittances – both of which could combine with higher oil prices to ease the pressure to more aggressively raise rates to combat the FX crisis.
Observably, notable global apex banks have opted for inertia to allow their recoveries to gain firmer footing before effecting indicative rate hikes despite reports and expectations of Q1-2021 growths and inflation increases.
In Nigeria, CardinalStone said liquidity pass-through is already driving a repricing of yields in the market and narrowing the negative “real” returns in the fixed income space.
“In our view, the reality of low liquidity-induced increases in yields (as macro risks demands) and the lessons from foreign central banks could ease pressure on the MPC to effect any indicative policy change on Tuesday that could charge up the bearish sentiments in the market”, the investment firm explained.
It added that the outlook for yields remains primarily biased to the upside on the impact of narrowing liquidity (which, for us, has been the biggest driver of domestic rate swings in the last 18 to 24 months).
Delving into the Q1-2021 growth dynamics Nigeria’s 0.51% year on year growth was driven by the non-oil sector, which rose by 0.79% YoY from 1.69% in Q4-2020 to mask 2.21% deterioration in oil GDP.
Non-oil GDP growth was primarily supported by 7.69% and 2.28% YoY growth in telecoms and Agric GDPs.
Telecoms grew at its slowest pace in 12 quarters to possibly reflect restrictions on new SIM registration and fear of NIN-related sanctions in the quarter.
At 22.35%, agric’s contribution to overall GDP came in at the lowest level in four quarters to indicate the likely impact of a soft base effect.
Elsewhere in non-oil, manufacturing (+3.40%) exited recession aided by cement and food, beverage, and tobacco, while real estate output increased by 1.77% year on year.
Financial institution GDP growth also moderated to 0.15% from an average of 14.18% across the four quarters of 2020, in line with the milder than expected credit creation in the banking sector.
Even though non-oil GDP came in slightly above the waters in Q1-2021, there were significant concerns in trade which plunged 2.43% and 23.75% drop in road transport readings.
Despite some traces of weakness within non-oil, CardinalStone said the soft underbelly of the current GDP reading was mainly evinced by sustained recession in the oil sector, which suffered from another contraction in oil output in the quarter to 1.72mbpd from 2.07mbpd in Q1-2020.
In December 2020, there were reported shutdowns in Forcados and Okono terminals due to suspected leaks on Trans Escravos Pipeline and Mystras— Okpoho subsea pipeline, respectively.
Likewise, Abo, Usan, Ima and Escravos terminals were shut down for maintenance.
Production was also interrupted at Yoho, Agbami, Pennington, Que Iboe and Erha terminals due to planned repairs/maintenance, fire incidence, pump and flare management.
“We believe these production setbacks may have spilt into the review quarter. We retain a GDP growth projection of about 1.7% for 2021, aided by expected robust outturns in Q2-2021 and Q32021 due to the low base effect from the coronavirus affected quarters of 2020”, analysts at CardinalStone said.
In addition, the firm added that the conclusion of repairs and maintenance activities across key oil terminals is likely to support the “black gold’ sector in the coming quarters.
It said more robust growth recovery is also expected to embolden the monetary authorities to fast-track the normalization of rates in the latter parts of the year.
Analysts at CSL Stockbrokers have predicted that the monetary policy committee (MPC) of the Nigerian central bank will hold key rates as output gap remains widened after a tepid economic growth in the first quarter (Q1) of 2021.
“At the monetary policy committee (MPC) meeting scheduled for today and tomorrow, we expect the MPC to keep the policy rate stable at 11.5%”, analysts at the firm said in a report.
Explaining the prediction, analysts said despite the growth trajectory witnessed in the first quarter of the year, the economy remains fragile and significantly weaker compared with pre-pandemic level.
“As such, a rate hike might worsen the fundamentals”, CSL Stockbrokers said in a report. On the other hand, analysts said although Inflation retreated in April, risks are firmly tilted to the upside.
“We expect this to remain a concern for the committee which should stop any consideration of a reduction in rate”.
Growth sustained, but the output gap remains widened.
Nigeria’s first-quarter GDP showed that economic momentum accelerated by 0.5% compare with 0.11% growth recorded in Q4-2020, according to National bureau of Statistics (NBS)
NBS data showed that the reported growth was driven mainly by the non-oil sector which surged +0.8%, supported by 3.4% growth in the Manufacturing and 2.3% in the Agricultural sectors.
On the flip side, the Organisation of Petroleum Exporting Countries (OPEC) production cut commitments led to a contraction in the oil sector (-2,2%) for the fourth consecutive quarter.
“In our view, while the continued recovery of the economy from recession should provide some respite for the committee, economic activities are still fragile, and the output gap remains widened”, CSL Stockbrokers said.
Analysts said as such, a rate hike might dampen fundamentals.
Since the last monetary policy meeting, Naira has been relatively stable across the various foreign exchange windows, support by the elevated crude oil prices.
However, the foreign exchange reserve has sustained a downward trend, on the back of increased FX intervention by the CBN and low impetus for new foreign portfolio inflow (FPI) or hot money.
FPI funds which historically contributes about US$13.4 billion on average to the total FX reserve now accounts for about US$5.1 billion.
“In our view, as global risk aversion eases, foreign investors’ interest in risky assets in emerging economies should improve. However, despite CBN’s efforts to attract FPI into the economy, foreign investors are likely to remain on the sidelines, save for clarity on FX policy and repatriation mechanism, despite stronger carry trade”, CSL explained..
Recalled the CBN stopped the daily publication of the official rate on its website from 14 May. The investment firm noted that while this may connote FX convergence, analysts said they expect the CBN to provide clarity at the MPC meeting tomorrow.
“If the move is towards unification with the I&E rate at US$410, it would help simplify Nigeria’s intricate FX regime and could provide a slight boost to the government’s oil revenue”, analysts said.
Also, the CBN has continued to manage exchange rate pressure via administrative measures, including the indefinite extension of the CBN’s Naira 4 Dollar Scheme, which offers a N5 incentive for every dollar received as a remittance inflow through licensed international money transfers operators.
“We maintain our view that the policy may likely not be effective, given a wider parallel market premium (18%), which makes it far more lucrative to send money through unofficial channels.
“As such, these administrative measures are unlikely to address the poor FX supply and liquidity, with the FX volume at the I&E window remaining subdued.
“Overall, we forecast the CBN will likely devalue the Naira by about 5-7% by year-end to unlock FX liquidity and curb the external imbalances, which is projected at US$10.80 billion – 2.1% of the GDP – for 2021”, CSL Stockbrokers said.
Risks to inflation are firmly tilted to the upside.
Against consensus expectations, inflation retreated slightly by 5bps to 18.12% in April 2021, the first decline since the border closure in August 2019.
However, this may not be significant enough to sway the MPC, as the inflation rate remains well above the long-run level and as the current sources of inflationary pressure such as security challenges and its effect on food supply and high utility costs remain.
As such, the Committee could either opt for a rate hike or intensify liquidity management measures like the CRR debits. The latter seems more likely and more effective as current inflation is largely supply driven.
“Overall, we expect the MPC to hold the MPR rate constant at 11.5%. We however forecast a 50bps hike in the rate in the second half of the year as the output gap is projected to narrow”, analysts added.
Monetary Authority Unfazed by Inflation Condition, Keeps Policy Rates
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