MPC: Analysts See Increase In MPR | Independent Newspapers Limited
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MPC: Analysts See Increase In MPR

Posted: May 23, 2016 at 6:12 am   /   by   /   comments (0)


…Differ On Exchange Rate


Bamidele Ogunwusi



As the Monetary Policy Committee (MPC) meets in Abuja for its 250th meeting today and tomorrow, analysts said the committee, among other things, may adjust the Monetary Policy Rate (MPR) by about 2 percent to 14 percent, but differed on exchange rate adjustment.

On the other hand, Bismarck Rewane, Managing Director and Chief Executive Officer, Financial Derivatives Company Limited, said the last thing CBN will do is to jack up the MPR since economic growth is already negative.

He, however, said CBN must take the right decision on interest and exchange rates to develop the economy or pursue inflation rate.

“We now expect the central bank (CBN) to tighten its policy rate by 100 bps to 13 percent at the May meeting,” Razia Khan, chief economist at Standard Chartered Bank, said.

Bongo Adi, Economics Lecturer at the Lagos Business School (LBS), said “the MPC will focus on the rates, essentially. Top on the agenda would be harmonising what seems to be a disjointed exchange rate system with almost three rates obtainable in the market as we speak.”

“To tackle inflation, the rates must be nudged upwards. But again, they have a difficult task as I wonder what difference that would make, seeing that we are dealing with structural problems in the real sector rather than a nominal issue”, said Adi.

Muda Yusuf, Director General, Lagos Chamber of Commerce and Industry, (LCCI) said he does not see the CBN changing MPR or naira to dollar exchange rate because of the negative economic growth recorded in the first quarter of the year and the need to reflate the economy.

He said the economy is already suffering lower purchasing power as many state governments are unable to pay salaries or contractors, noting also the confidence issue from investors because of lack of economic blue print and exchange rate, high energy cost arising from fuel and electricity shortages and high production cost and prices because of interest rate from banks.

He, therefore, said what the CBN need to do is to stimulate the economy by leaving the rates as they are “because economic report has already shown that we are trending towards recession and we need to reflate the system.”

Analysts at FSDH Merchant Bank and Access Bank’s Economic Intelligence Unit believe that an adjustment in MPR will produce positive real yields in the financial market. Specifically, those at Access Bank said if adopted, it will curb price growth and return real interest rates back to positive territory.

They, however, differ on the adjustment of the exchange rate. While analysts at FSDH Merchant Bank are of the opinion that adjusting the exchange rate to a level that reflects the current economic fundamentals in the country is overdue at this time those at Access Bank’s Economic Intelligence Unit said the foreign exchange policy should be retained by the CBN.

“We anticipate the committee will retain the existing foreign exchange policy regime. We believe the recent directive of the government that marketers should now source their foreign exchange requirement for imports from autonomous sources will buy the central bank some time in maintaining the currency peg.

“In addition, the committee is likely to acknowledge that reforms on the administration side, such as the recent China deal, details of which have not fully been disclosed, will address foreign exchange supply constraints”, analysts at Access Bank said.

These two measures, according to FSDH, are important to stimulate investors’ confidence in the Nigeria’s economy and financial market, adding that the meeting, coming at this time, offers a rare opportunity for the MPC to stimulate the economy through appropriate monetary policy.

“We expect a change in the exchange rate policy of the CBN to boost the external reserves through inflows from foreign investors. We project an exchange rate of US$1/N275 with a band of +/-5 percent; and an increase in the MPR to 14 percent with a band of +/-2 percent.

“The value of the naira remains weak because of the excess demand over supply. Following the announcement of a new pump price, the value of the naira depreciated further at the parallel market. The parallel market rate depreciated by 9.58 percent to US$1/N355 as at May 16, 2016 from US$/N321 before the announcement of the increase in fuel price. The CBN official market rate remains at US$1/N197.

“We believe the official exchange rate of US$1/N197 is almost redundant at the moment as few or no transaction is carried out at the official exchange rate. An adjustment in the exchange rate is imperative to align the rate with economic realities”, the FSDH research team said.

At the end of its March 2016 meeting, the MPC increased the Monetary Policy Rate (MPR) to 12 percent from 11 percent and maintained the asymmetric corridor at +200 basis points and -700 basis points; increased the Cash Reserve Requirement (CRR) to 22.50 percent from 20 percent. It retained the Liquidity Ratio at 30 percent.

On a global level, the global economy is still faced with a weak recovery path. The Organisation of the Petroleum Exporting Countries (OPEC) maintained its global growth forecast at 3.1 percent for 2016. It expects an improvement in the momentum of the global economy in second quarter of 2016, driven majorly by recovery in the U.S., after very low growth in the first quarter of 2016.

The report says that the weak and fragile growth from China and India means that the demand for crude oil will remain weak. This means that oil price may not maintain a strong growth in the short-term with adverse impact on the Nigerian economy.

It, however, said that the economic growth in Nigeria remains slow and below historical performance as the gross domestic product (GDP) was 2.79 percent in 2015, compared with 6.22 percent in 2014.

“There are expectations of a pick-up in economic activities for the remainder of 2016 because of clearer fiscal policy direction. However, there are new threats in the economy, particularly from the resurgence of pipeline vandalism in the Niger Delta region. Therefore, a bold monetary policy announcement to reflect the economic realities will enable investors to take investment decisions that can stimulate economic growth.”

On the inflation rate, which has been trending up since January 2016, FSDH said the recent increase in fuel pump price would increase inflation rate further as from May 2016. The inflation rate in April 2016 increased to 13.72 percent from 12.77 percent in March 2016. A restrictive monetary policy stance is consistent with the current and short-term outlook of inflation rate.

The prospect for acceleration in the rate of decline of U.S. crude production has partly buoyed crude oil prices in recent weeks. Other factors are the weaker U.S. dollar, supply disruptions and forecasts for a sharp fall in non-OPEC production. Nevertheless, fundamentally, oversupply still persists, as oil output remains high.

“The price of Bonny Light crude oil increased by 20.39 percent to US$49.54 per barrel as at May 17, 2016 from US$41.15 per barrel on March 22, 2016. Nigeria’s crude oil production has fallen due to renewed pipeline vandalism. This has serious implication for the fiscal position of the government. An adjustment in the exchange rate to US$1/N275 will give the government additional naira revenue from oil exports”, they added.

The external reserves, according to them, have not benefitted from the increase in oil price because of the strong demand for foreign exchange and the drop in crude oil production, adding that the 30-day moving average external reserves declined by 4.38 percent from US$27.88 billion at the last MPC meeting to US$26.66 billion as at May 17, 2016.