Economic analysts policy rates to stay unchanged on sustained risk of capital flow reversals. In two pre-MPC notes seen by business a.m., analysts at Access Bank and Afrinvest research believe the Central Bank of Nigeria would leave key rates unchanged when its monetary policy committee meets this week.
The MPC of the Central Bank of Nigeria (CBN) will be deciding on its key policy rates between 23rd and 24th July, 2018 amid concerns on policy normalisation in global systemic central banks, rising yields on emerging market assets – resulting from down- side risk factors consequent on sustained foreign capital flow reversals since Q2:2018, say analysts at Afrinvest Research.
“We expect the MPC to maintain the benchmark interest rate at the current level due to the anticipated expansionary impact of fis- cal spending following the signing of the 2018 budget. Furthermore, the ongoing policy normalization by ma- jor central banks, namely the US Fed and the ECB may dampen the appetite for a rate cut as the apex bank seeks to preserve the attractiveness of Nigerian financial assets and stem the reversal of capital
flows presently experienced in the financial markets,” said analysts at the Economic Intelligence Unit of Access Bank Plc.
The assumptions on which the analysts based their pro- jection are flimsy domestic economic recovery, steady moderation in inflation, polity fragilities and disquiets around fiscal spending ahead of the 2019 general election.
“As the MPC must keep a delicate balance between growth and price stability, we believe the Committee will maintain status quo on all policy rates in order to avoid upsetting the current economic momentum. Our position is on a balance of factors underscored by careful analysis of sustained positive conditions in global commodity markets alongside emerging market risks and continued disinflation amid steady but weak growth momentum,” the Afrinvest analysts posited.
They see rates remaining unchanged for the rest of H2:2018 as the window for a rate cut, according to them, is increasingly narrowing on polity fragilities.
The uncertainty usually associated with change of government in Nigeria will become full blown in H2:2018 ahead of the 2019 general election as foreign investors are likely to flee for “safer haven” economies.
“Although there are arguments in favour of tightening considering the threat of shrinking interest rate differential between Nigeria and advanced markets, which makes naira assets less attractive, we believe the Committee will shy away from this as the CBN could deploy other monetary policy tools (OMO) to achieve this without tweaking MPR,”they highlighted.
The consensus is that ac- tivities in the financial market will remain dictated by global and domestic macroeconom- ic conditions. Whilst money market rates are continuously moderating both at the pri-
mary and secondary markets, investorappetiteseemstobe shifting towards shorter-term bond instruments as recent sell-offs have resulted in the normalisation of the sover- eign yield curve.
Rate regularisation, espe- cially at the T-bills end of the market, appears to be paving
the way for more corporate debt issuances, notably commercial papers. On the flip side, the equities market will remain pressured by capital flow reversals on key risk concerns, notwithstanding stable macroeconomics and improving fundamentals of companies.
Frontpage September 13, 2018