Increased fiscal injection, Forex inflow to influence MPC decision

Analysts predict status quo

By Babajide Komolafe

THE impact of  expected increased fiscal spending on inflation and the  need to sustain foreign exchange inflows from foreign investors will influence the outcome  the  Central Bank of Nigeria (CBN)’s Monetary Policy Committee (MPC)’s meeting holding  today and tomorrow.

Meanwhile financial market analysts have predicted that the MPC will retain all the policy rates at their current levels, in spite of the four month decline in inflation rate.

At the last meeting which was concluded on May 23, the MPC retained the Monetary Policy Rate (MPR) at 14 per cent; the Cash Reserve Ratio (CRR) at 22.5 per cent; the Liquidity Ratio at 30 per cent; and the Asymmetric corridor at +200 and -500 basis points around the MPR.

This decision was majorly influenced by the liquidity risk of fiscal injections from the 2017 budget. Speaking at the end of the meeting, CBN Governor, Mr. Godwin Emefiele said: “The Committee also welcomes the passage of the 2017 budget and called on the relevant authorities to ensure its judicious implementation, especially, the capital budget in line with the Economic Recovery and Growth Plan. It, however, noted the associated risks to banking system liquidity of the envisaged fiscal injections during the remainder of the year. Against this risk, the Committee contemplated the prospects of further tightening of monetary policy should the need arise.”

This concern became imperative on June 11th when the Acting President, Professor Yemi Osinbajo signed into law the N7.4 trillion 2017 appropriation bill. This paved the way for rapid release of funds for  various capital projects which had been delayed by the late passage of the bill.

According to analysts at Cowry Assets Management Limited, a Lagos based investment firm, the increased public sector spending as well as the need to keep interest rate above the inflation rate, so as at attract foreign exchange through foreign portfolio inflows will influence the decision of the MPC meeting this week.

They stated: “We opine that the MPC, will retain the benchmark interest rate, MPR, at 14 per cent despite recent moderations in inflation rate. This is partly predicated on anticipated increase in public sector spending, a vulnerable external sector, and the need to ensure positive real returns on investments in order to attract foreign portfolio inflows.”

Analysts at Afrinvest Plc made a similar projection saying the MPC will largely be influenced by the need to continue to attract foreign investors in order to consolidate recent gains in the foreign exchange market. They stated: “Whilst there are calls from the private sector and government officials to ease monetary policy, given the improvements that have been recorded in economic leading indicators, the MPC will likely ignore this call on the ground to continue to attract foreign investor participation and prevent speculations on the foreign exchange market.

“Our view of interest rate outlook is that despite the moderating headline inflation rate, the CBN will tarry a bit in easing monetary policy due to fragility of the forex market recovery. A monetary easing will likely dampen the reserve to hit $32bn by December

Nigeria (CBN) will continue to intervene.

On interest rate and inflation rate, he projected that they would remain in double digit because the CBN still has the fear of inflation and once the fear of inflation is maintained it is likely that they look away from interest rate adding that an economy in recession would be under pressure of increasing inflation.”

Cost of funds volatility persist as CBN mop up N213bn

Meanwhile interest rate volatility in the interbank money market persisted last week due to inflow of N802 billion and outflow of N213.9  billion. The inflow comprises of N243 billion from Paris Club loans repayment to state governments, N462.36 billion from statutory allocation funds and N97.4 billion from repayment of matured treasury bills (bills).

These inflows caused short term interest rate to fall by 40 basis points between Monday and Thursday. This trend was however halted on Friday as the CBN mopped up N213.9 billion through treasury bills. As a result cost of funds rose sharply on Friday closing higher than the previous week level. Reflecting this development, interest rate on Collateralised lending dropped from 9.0 per cent the previous week to 4.8 per cent on Thursday but rose sharply to 14 per cent at the close of business on Friday. Similarly, interest rate on Overnight lending dropped from 9.75 per cent the previous week to 5.3 per cent on Thursday but rose to 14.92 per cent at the end of Friday. This trend is expected to persist this week as the CBN is expected to issue bills to cancel out the impact of expected inflow of N65 billion from payment of matured bills this week.

Naira in mixed performance as CBN sustain intervention

The naira recorded mixed performance in the foreign exchange market last week even as the CBN injected $195 million in continuation of its intervention in the forex market.

The naira appreciated by N1 at the parallel market, as the exchange rate for the market dropped to N366 per dollar  last week from N367 per dollar the previous week.

But at the NAFEX, which is also known as the Investors & Exporters window, the naira depreciated by N3.54 as the indicative exchange rate rose from N362.83 per dollar the previous week to N366.37 per dollar last week. Data from the Financial Market Dealers Quote (FMDQ) showed that $257 million was traded in the market last week.

On the other hand the CBN sold $195 million into the interbank forex market last week comprising $100 million for the wholesale segment, $50 million for the Small and Medium Enterprises (SMEs) segment, and $45 million for invisibles segment.

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