The nation’s fast depleting external reserves and the persistent pressure on the naira will top the agenda as the Central Bank of Nigeria’s Monetary Policy Committee begins its two-day meeting today (Monday).
Being the first MPC meeting after the suspension of Mr. Lamido Sanusi as the CBN governor, the financial markets are edgy about the likely outcome of the meeting due to the present high level of uncertainty.
Today’s meeting will be the first to be chaired by acting Governor of the CBN, Mrs. Sarah Alade.
While analysts are divided over the possible devaluation of the naira, there is a consensus of opinion that the post-Sanusi MPC will continue the monetary tightening stance of the suspended governor.
They argued that the current economic situation in the country supported the need to tighten the monetary policy further.
The analysts also believed that Alade, who until her appointment was the deputy governor in charge of economic policy, had always voted in support of monetary tightening.
The Financial Derivatives Company Limited, in its latest economic report, predicted that the MPC would increase the Cash Reserve Requirement on public sector deposits to 100 per cent, up from 75 per cent.
The FDC report stated, “We anticipate two possible scenarios alongside the hike in the CRR. The first scenario is a shift in the exchange rate midpoint from N155 to N165/$, which is an estimated three to five per cent depreciation in the naira. The rationale for this is the increased volatility recorded at the interbank and parallel markets, and the CBN’s continued support of the naira at a cost to the external reserves.
“The premium between the official and parallel market remains wide at N16.26 compared to N8.25 in October 2013. Our second scenario is an increase in the MPR to 13 per cent per annum to tighten liquidity conditions in the money market.”
The Chairman, United States Reserve Bank, Ms. Janet Yellen, announced that the bank could push up interest rates earlier than expected.
The FDC report noted that the announcement, coupled with the rapid depletion of Nigerian external reserves, was making the market operators short on the naira.
According to the report, the major concern for the MPC remains exchange rate stability and the depleting external reserves level at $38.32bn as of March 18.
The Managing Director, FDC, Mr. Bismarck Rewane, recalled that the February inflation rate declined to 7.7 per cent from eight per cent in January, indicating benign inflationary risks in the short term.
He, however, said that in the medium to long term, the outlook for the Consumer Price Index was less optimistic as the research firm anticipates inflationary pressures stemming from the depreciation of the naira, increased gas prices and the new automotive policy.
Analysts at BGL Plc, a research and advisory firm, also predicted that the MPC would devalue the naira and raise the CRR on public sector funds to 100 per cent.
It, however, stated that Monetary Policy Rate would be held at 12 per cent, while the private sector CRR could remain at 12 per cent.
The Managing Director, Cowry Asset Management Limited, Mr. Johnson Chuwku, said although naira devaluation was desirable, the MPC might not do so at the moment considering the direct impact such an action might have on inflation in a country preparing for elections next year.
Chukwu believes the MPC will raise the CRR on public sector deposits to 100 per cent, but stressed the need to equally raise the CRR on private sector deposits to 15 per cent from 12 per cent.
“The liquidity the private sector is having now is from the private sector; so, if the MPC is really interested in monetary tightening, it needs to also raise the CRR on private sector deposits to 15 per cent,” he noted.
Analysts at Afrinvest said recent happenings at the international financial markets might force the MPC to raise the MPR to 12.5 per cent.
Afrinvest, in its weekly report, said, “The MPC will focus more on preserving foreign portfolio investments in the country and curtailing the dwindling external reserves (declined 12.2 per cent year-to-date). In line with other emerging economies that raised their interest rates (Turkey: from 4.5 per cent to 10.0 per cent; South Africa: from 5.0 per cent to 5.5 per cent; Indian: from 7.75 per cent to 8.0 per cent; and Brazil: from 10.0 per cent to 10.75 per cent), we expect the MPC to follow the same path.
“As a result, we expect the MPR to be raised by 50 basis points to 12.5 per cent. This will calm foreign flow reversals and reduce pressure on the naira in the near term.”
Bank of America holds a slightly contrary view on the forthcoming MPC meeting. The research analyst firm predicts a status quo on the MPR, an increase in CRR to 100 per cent and a possible adjustment in the exchange rate band.
The BoA report stated, “We expect the MPC to keep the Monetary Policy Rate on hold at 12.00 per cent given that the recent elevated levels of dollar sales by the CBN have successfully brought the naira down from last month’s highs. This means there is no immediate need for a rate hike, in our view. However, there is a small chance the exchange rate band could be slightly adjusted.
“In the January MPC minutes, Alade spoke of the high levels of liquidity in the banking sector, the slight uptrend in inflation and the risk that increased government spending poses to inflation ahead of the 2015 presidential elections. Given that she also supported the increase in the Cash Reserve Ratio on public sector deposits from 50 per cent to 75 per cent, we believe she is likely to maintain as hawkish a bias as her predecessor, Sanusi.”
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