Turnover in I&E window falls by 50%
Analysts project lower inflation rate for February

By Babajide Komolafe

THE interbank money market will, this week, receive liquidity boost of N453 billion hence expectation of stability in cost of funds.

Last week, cost of funds succumbed to liquidity pressure occasioned by aggressive liquidity mop up by the Central Bank of Nigeria (CBN) via sales of secondary market (Open Market Operations, OMO) treasury bills (TBs).

The apex bank held OMO sales through out the week, except for Wednesday, which resulted to N307.7 billion outflow from the interbank money market. The impact of the outflow was moderated by inflow of N152.9 billion on Thursday from matured TBs. Hence, average short term cost of funds rose slightly by 110 basis points (bpts) when compared to the level in the previous week.

According to data from Financial Dealers Market Quote (FMDQ), interest rate on Collateralised lending (Open Buy Back, OBB) rose by 130 bpts to 9.8 percent from 8.5 percent the previous week. Similarly, interest rate on Overnight lending rose by 83 bpts to 10 percent from 9.17 percent the previous week.

This week, the market will enjoy inflow of N453.5 billion from maturing TBs, comprising N269.1 billion worth of maturing OMO bills and N191.4 billion worth of maturing primary market bills. While the CBN is expected to sell N191 billion worth of primary market bills this week, analysts project cost of funds to remain stable, barring upsurge in OMO bills issuance by the CBN in pursuit of its liquidity mop up operations.

“In the coming week, despite an OMO maturity of N261.9 billion, we expect rates to remain at similar levels as the CBN continues its OMO auctions to mop up excess liquidity.”, projected analysts at Lagos based Afrinvest Limited.

Turnover in I&E fall by 50%

On the foreign exchange scene, the volume of dollars traded (turnover) in the Investors and Exporters (I&E) window fell by 50 percent last week while the naira depreciated by 22 kobo. Financial Vanguard analysis of daily trading results in the window showed that turnover dropped to $659 million last week from $1.33 billion the previous week. Year-to-date, foreign investors and exporters have traded $11.26 billion in the window.

The sharp decline in turnover prompted decline in the fortunes of the naira in the window, as the indicative exchange rate closed the week higher at N360.32 per dollar from N360.1 per dollar the previous week, translating to 22 kobo depreciation for the naira.

The naira, however, remained stable at N362 per dollar in the parallel market during the week. Meanwhile, the CBN sustained its weekly intervention in the foreign exchange market by selling $210 million via the interbank foreign exchange market.

Analysts project lower inflation rate for February

Ahead of the release of the inflation data for February this week by the National Bureau of Statistics (NBS), analysts at Financial Derivatives Company (FDC) Limited and FSDH Merchant Bank have projected further decline in the inflation rate for the month.

The inflation rate dropped consistently by 359bpts from a peak of 18.72 percent in January 2017 to 15.3 percent in January this year.

Analysts at FDC projected the inflation rate to fall to 14.75 percent in February while FSDH analysts projected inflation rate of 14.31 percent for the month.

Explaining the basis for their projections, FDC analysts stated: ZQWe are forecasting a sharp fall in year-on-year headline inflation to 14.75 percent for February 2018, after a steep decline from Januaryôu inflation of 15.13 percent. Apart from being the 13th consecutive monthly drop in inflation, the rate of decline has increased from the previous monthôu deceleration of 0.24 percent.

“We expect month-on-month inflation to increase to 1.01 percent (12.82 percent annualized). During the month, certain price moderating factors were noticeable. These include:

“A decline in most global commodity food prices such as sugar and rice and to a limited extent, the stability of the exchange rate within the N362/$-N363/$ band. Ample forex supply and exchange rate stability continue to taper imported inflation.

“Reduced naira liquidity in the system as the average opening position of banks dropped by 38.63 percent to N173.78 billion long in February. Marginal expansion in production levels – evident in an increase in FBN PMI to 54.7 from 54.6 in Jan’18. This reflects a soft inventory build-up by manufacturers in February.

“Improved power supply from 3,690MW/hr in January to 3,937MW/hr. However, there was one price propelling factor which had a limited impact on inflation. This was the lingering fuel scarcity in the country.”

On their part, FSDH analysts stated: “The expected decrease in the inflation rate is largely attributable to the base effect of previous year. In addition, we note the decrease in some major food prices, as well as the slowdown in the price movement in some categories of non-food items in the Consumer Price Index (CPI) basket.

“The prices of most of the food items we monitored in February 2018 increased marginally, leading to 0.80 percent increase in our Food and Non-Alcoholic Index. The Food and Non-Alcoholic Index increased by 17.50 percent from 224.77 points in February 2017. FSDH Research notes that there is a potential increase in local prices of imported food items because of the faster than expected increase in international food prices. This may have negative impact on inflation rate going forward.”