Research analysts at Financial Derivative Company (FDC) say there is a 60 percent probability rate for the Central Bank of Nigeria monetary policy committee (MPC) to keep rates.
Their projection is based on current money supply growth, which according to them, has remained below the CBN target of 10.84 percent, tempered by sterilization via cash reserve requirements, open market operations and forex auctions.
According to the analysts, the threat of a demand-pull inflation is relatively subdued, which would be a strong argument to support a 60 percent probability that the CBN’s monetary policy committee (MPC) will maintain the status quo as regards monetary policy rates.
Although the researchers noted that the money supply argument has an upside risk as a result of expansionary fiscal policy, they are of the opinion that external reserves depletion, capital flight and imminent currency weakness are more reasons why the MPC will maintain status quo or further tighten rates when they meet on the 24th and 25th of this month.
Also supporting the argument for the maintenance of status quo is the rising inflation expectation informed by risks of minimum wage review, budget disbursements, and election spending.
On the other hand, the flat GDP growth recorded in the second quarter of the year, tepid consumption and low aggregate output coupled with contracting credit to the private sector which is yet to hit the CBN’s target of 5.64 percent as banks are averse to lending due to high non performing loans (NPLs) could necessitate a decision to cut rates.
The decision to cut rate, which could also be as a result of worsening unemployment/underemployment rate has however been put by the economic think tank at a 30 percent probability.
According to FDC, the rationale to cut rate will be to boost slowing GDP growth rate of 1.5 percent as at Q2, support growth, reduce government’s debt service obligation, and increase credit to the private sector
The resulting impact will ensure that there are more resources freed up for spending, a reduction in NPL and strengthened asset quality.
The decision for a rate cut could also exacerbate inflationary and exchange rate pressures, reverse gains already made on reduced importation and increase pressure on the naira, FDC explained.
Highlighting the third scenario of 10 percent probability which could see the CBN tighten monetary policy further, the FDC said rationales for such decision will be to curtail inflationary pressures, curb capital flight and strengthen the naira.
The FDC also noted that a decision to tighten rate would be in line with the IMF’s recommendation in its Article IV review impact.
A rate cut will also weaken consumption, increase the domestic cost of borrowing to investors, lead to re-pricing of assets, further constricting credit to the real sector and yield rising NPLs.
Frontpage February 14, 2019