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Exchange rate, inflation to headline MPC meeting

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The Monetary Policy Committee, MPC, meets today to determine the direction of the financial services sector and the economy to a large extent.

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Finance and economic experts agree that the meeting is a crucial one for the apex bank, citing the changes in the polity amid equally rapidly changing global dynamics.

Since the last meeting in May, a new government with a distinctive market-economy agenda has directly and indirectly influenced many macroeconomic changes.

These include the abolition of arbitraged multiple foreign exchange (forex) windows and the adoption of a market-determined forex rate, the suspension of Emefiele and the removal of petrol subsidy.

The apex bank has also started somewhat nascent reforms with a review of corporate governance rules for the financial services sector and policy delineation of peculiarities of wholesale or merchant banks and commercial banks.

The latest report showed Nigeria’s inflation rate rose to an 18-year high at 22.79 per cent in June.

Leading finance and investment analysts are unanimous that the MPC, which had raised the benchmark interest rate for seven consecutive times, may tone down its hawkish stance and at best hold the benchmark rate.

Many analysts expect a modest increase in the benchmark rate.

The MPC had in May increased the Monetary Policy Rate (MPR) by 50 basis points from 18.0 per cent to 18.50 per cent, the seventh increase in aggressive inflation-targeting hikes.

The apex bank then retained all other ratios, with a Cash Reserve Ratio at 32.5 per cent, Liquidity Ratio at 30.0 per cent and Asymmetric Corridor of +100-700 basis points.

Group Executive Director, Investment Banking, Cordros Capital Group, Mr. Femi Ademola, said the July 24-25 meeting is a very important one for the apex bank since it is the first for the new administration.

Ademola stated that the CBN faces a major dilemma of either continuing its rate hike to further dampen the rising inflation trajectory or holding the benchmark rate to observe emerging developments and allow for the impact of the last rate hikes to permeate the economy.

However, on the balance of all the factors, he expects the apex bank to adopt a hold stance, noting that aside from global central banks approaching the end of the interest rate hiking cycle, the MPC might have reached a point where over-tightening becomes a concern as the economy is already battling with the negative impact of elevated interest rates.

According to him, at this stage, continuous increases in the MPR at a time when non-monetary factors are the dominant upside risk to near-term price pressures will undermine economic growth.

“On a balance of factors, while our baseline view is for the MPC to adopt a hold stance at this meeting, we do not rule out 25 basis points to 50 basis points hike in the MPR while retaining other policy parameters,” the Cordros Capital boss stated.

Ademola explained that while the pro-market stance of the new administration should readily call for a moderation on MPR in the bid to spur growth, the inflationary trend is showing the need for more liquidity tightening.

He noted that while moderation may be justified with the argument that the inflationary issues in Nigeria are not a monetary phenomenon but rather structural, there is a bid to balance the situation.

Ademola added that the MPC may take a hold position on all the parameters except the CRR, which may be increased due to the supposed liquidity surfeit in the economy.

Managing Director, APT Securities and Funds, Mallam Kasimu Kurfi, said the meeting is a difficult one for the apex bank given recent changes.

According to him, the MPC meeting is expected to retain the rate but they may also consider bringing it down given Tinubu’s policy direction to bring MPR into single digits to increase productivity by manufacturing industries. The government plans to catalyse employment creation through increased productivity.

He, however, noted that with the increase in the price of petroleum and the devaluation of the naira against the dollar, increasing interest rates may seem ideal to hedge against inflation.

Professor of Capital Market and Head, Securities and Investment Management Department, Nasarawa State University, Keffi, Uche Uwaleke, said the decision of the MPC would be influenced by the rising inflation expectations due largely to the sudden removal of fuel subsidy, the pressure on the naira and exchange rate volatility occasioned by the recent naira float.

He noted that while some considerations tend to recommend a further rate hike aimed at taming inflation, the MPC may equally recognise that the removal of fuel subsidy has slowed down economic activities considerably.

Uwaleke added: “A further increase in the MPR is likely to endanger the asset quality of banks through an increase in non-performing loans as deposit money banks reprice their loans. In this regard, the balance of risks dictates that the MPC should pause the policy rate hikes, which have been on since May last year by maintaining a hold position on all policy parameters during the meeting.

“The MPC should recognise that much as its primary mandate is to maintain price stability, it equally has a responsibility to support output growth.

“This is against the backdrop of the fact that many of the factors driving inflation in Nigeria, such as insecurity affecting food output and high energy costs are outside the control of the CBN.”

“All said, the MPC should seize the opportunity of the meeting to signal readiness to support output growth through policies geared towards fostering a low-interest rates environment while keeping an eye on inflation using a mix of heterodox measures,” Uwaleke, president of the Association of Capital Market Academics said.

Financial Derivatives Company (FDC) said while the MPC has been resolute in its statements about maintaining a tightening stance, in reality, monetary conditions have been loose as effective rates of interest have been declining.

“The difference between inflation and effective interest rates has widened to 1700 basis points. In the current dispensation, the CBN and the Debt Management Office (DMO) will have no alternative but to allow effective interest rates to rise sharply,” FDC stated.

FDC stated that it expected the MPC “to maintain status quo after seven consecutive rate hikes”, noting that high inflation and low-interest rates could support the dollarisation of the economy as markets compensate themselves for the decline in the value of the currency.

FDC pointed out that the CBN must increase effective interest rates to incentivise savings and improve the currency’s stability.

Managing Director, Arthur Stevens Asset Management, Mr Olatunde Amolegbe, said the meeting was important because it would signal the harmonisation of views between the apex bank and the new government.

“The present government has indicated its desire to drive down interest rate as one of its policy objectives, so the MPC will be one of the bodies through which we will get an indication of how that will be achieved.

“If you look at some of the baby steps taken so far such as reducing the CRR requirements for merchant banks to 10 per cent, it is hard to see how this week’s MPC will justify raising rates .I will therefore say they are likely to leave the MPR unchanged or they could even drop it by a few notches if they fill bullish

“What will be more important however is what they choose to do with the CRR of the commercial banks.If they reduce that, it will have a significant impact on interest rates almost immediately,” Amolegbe, immediate past president of the Chartered Institute of Stockbrokers (CIS) said.

Adapted from The Nation Newspaper

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