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MPC to retain policy rates as N266bn inflow boosts interbank liquidity

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By Babajide Komolafe

FINANCIAL market analysts were, weekend, united in their projections about the outcome of the Central Bank of Nigeria’s 118th Monetary Policy Committee, MPC, meeting holding today and tomorrow. They argued that recent developments in the foreign exchange market and in emerging markets have eliminated the possibility of the MPC reducing the Monetary Policy Rate, MPR.

In a preview of the MPC meeting, titled: “MPC to Maintain Status Quo in View of Volatility in Emerging Markets Currencies”, Afrinvest analysts said: “As we mentioned in our April Headline Inflation reaction, we think the positive development in consumer prices within the last 14 months has presented the CBN with an opportunity to begin to converge Monetary Policy Rate (MPR) with market interest rates which have since priced-in inflation expectation.

However, we think the decision will be delayed due to the ongoing capital flow reversal and asset prices volatility in emerging and frontier markets which is a downside risk to what has come to be the CBN’s prime policy anchor – Exchange Rate stability. The current capital flow reversal has been the strongest test for liquidity in the Investors’ and Exporters’ Window (I&E Window) so far; a test it is yet to pass with flying colours. The CBN has responded to the volatility in the Fixed Income market and increased demand for  foreign exchange by tightening liquidity in the money market in the past two week.

“We believe the odds of the MPC slashing the MPR in the same period it is aggressively sterilizing liquidity is slim; hence we expect the CBN to maintain status quo on all rates.”

On their part, analysts at Cowry Asset cited the fact that the apex bank is yet to achieve single digit inflation rate, as well as increased fiscal and political spending. They said: “Ahead of the Monetary Policy Committee (MPC),  we expect a retention in policy rates moderating the MPR as inflation rate remains above single-digit target of the CBN. This is also informed by probable increase in both fiscal and political spending activities, among other things.”

N266.95bn inflow to boost interbank

Meanwhile the interbank money market will this week receive liquidity boost of N266.95 billion from maturing treasury bills, TBs, hence further moderation in cost of funds. Last week, cost of funds fell sharply following inflow of N330.30 billion from matured TBs, which cancelled out the impact of  N132.74 billion outflow from TBs sold by the CBN.

Data from the FMDQ showed that interest rate on Collateralised (Open Buy Back, OBB) lending dropped by 5,720 basis points (bpst) to 7.8 percent from 65 percent the previous week. Similarly, interest rate on Overnight lending dropped by 6,440 bpts to 9.0 percent from 73.42 percent the previous week.

The downward trend in the market was enhanced by the reduced liquidity mop-up activity of the CBN. Unlike the previous week, when the apex bank mopped up over N400 billion through Open Market Operation (OMO) TBs, last week the CBN mopped up N99.04 billion. Financial Vanguard analysis showed that that apex bank offered N146.74 billion worth of OMO bills and sold N99.04 billion comprising: N58.14 billion worth of 112-Days TBs, sold at 11.1 percent; and N40.9 billion worth of 182-Days bills, sold at 12.2 percent.

Also reflecting the level of  liquidity in the market, the primary (fresh) market TBs  auction conduced on Thursday recorded  117 percent oversubscription. Subscription to the N3.4 billion worth of 91-day TBs stood at N3.7 billion, while the CBN allotted N3.4 billion at 10 percent stop rate. Subscription to the 13.5 billion worth of 182-Days TBs stood at N20.9 billion while the CBN allotted N16.9 billion at 10.5 percent stop rate. Subscription to the 364-Days TBs stood at N48.6 billion, while the apex bank allotted N13.5 billion at 10.7 percent stop rate.

This week the inflow of N266.95 billion from maturing OMO bills is  expected to cancel out effect of outflow from FGN Bond auction of N70 billion and hence induced further downward movement in interbank interest rate. This however is baring aggressive liquidity mop up by the CBN.

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