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Declining reserves, rising inflation to dominate MPC considerations

By Babajide Komolafe

AS the nation’s external reserves continued its downward trend for the tenth consecutive week last week,  with month-to-date decline of $948 million, the ten man Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will meet for the 263rd  time today to brainstorm on policy measures to address the economic headwinds of declining external reserves, rising inflation and slowdown in economic growth

Analysts however expect the committee to retain the Monetary Policy Rate (MPR) at 14 percent for the ninth time since July 2016.

inflation

At its last meeting in July, the MPC retained all its policy rates at the same level saying, “the risks to the macroeconomic and financial environment appear fairly balanced with improvements in output growth and inflation. Holding policy at the current stance would support growth and further moderate inflation.”

Emerging Headwinds

However, since the July MPC meeting, the economy has been confronted with headwinds of persistent decline in external reserves, slowdown in growth of the gross domestic product (GDP) and first increase in inflation rate since January 2017.

Financial Vanguard analysis showed that external reserves have fallen by 6.2 percent or $2.9 between July 5th  when it peaked at $47.798 billion and Thursday September 20th  (last week) when it stood at $44.980 billion, the lowest in five months.

Last week, the reserves recorded the highest weekly decline of $357 million to $44.89 as at Thursday, September 20 from $45.247 billion Thursday of the previous week. Further analysis also showed that the reserves have fallen by N948 million so far in September.

The decline in reserves is driven by increased dollar sales by CBN in a bid to forestall naira depreciation in the face of rising dollar demand from foreign investors exiting the nation’s financial debt market. Analysts believe this development will persist till the end of the year due to political uncertainties, and further hike in interest rate by the United States Federal Reserves.

Added to this is the reversal in inflationary trend reflected in the August inflation rate which rose to 11.23 percent in August  from 11.14 percent in July, representing the first increase in inflation since January 2017 when the inflation rate peaked at 18.72 percent.

The above is compounded by the Gross Domestic Product (GDP) growth rate for second quarter of the year (Q2’18) which slowed to 1.5 percent from 1.95 percent in Q1’18).

Analysts’ projections

According to analysts at Financial Derivatives Company (FDC), these economic headwinds will make the MPC meeting of  today an interesting one with a difficult decision making process.

“The MPC, at its next meeting on September 24/25, would focus on inflationary pressures in the coming months, weak GDP growth (1.5 percent    in Q2’18) and external imbalances (external reserves decline, capital outflows). We expect this to make for an interesting meeting.

“The meeting will be pivotal in determining the direction of interest rates especially at a time of new fiscal policy leadership under a new finance minister. While the MPC’s decision can either make or mar the present situation, the decision making process will be particularly difficult, given the backdrop of rising consumer prices, depleting external reserves and potential exchange rate pressure.”

Notwithstanding these headwinds, analysts projected that the MPC will retain its policy rates.

“Whilst market players closely watch out for the United States    Federal Open Market Committee (US FOMC)    and Nigeria MPC meetings, and the FGN Bond auction which would hold in the coming week. Our sentiment remains slightly bearish, with the FOMC expected to hike rates for a third time this year; the   MPC though expected to hold rates might sound more hawkish”, said analysts at Zedcrest Capital Limited.

Also, analysts at Cowry Assets Management Limited, said: “Ahead of its scheduled meeting we expect the Monetary Policy Committee (MPC) to retain its benmark interest rate, MPR, at 14 percent within the existing of corridor +2 percent    and -5 percent. This is against the backdrop of 11.23 percent rise August inflation and the need to maintain positive real interest rates in order to countervail the argument for policy loosening amid slowing economic growth.”

According to analysts at FSDH Merchant Bank, the most appropriate option for the MPC is to hold its policy rates, in spite pressures from the three economic headwinds.

“FSDH Research believes the most appropriate monetary policy decision under the current economic and financial market situation is to hold policy rates at the current levels.

“Although there are some arguments to increase rates, the need to provide necessary incentives for the Nigerian economy to achieve inclusive growth negates an option of a rate increase.

“The CBN can continue to use the Open Market Operations (OMO) to manage liquidity in the banking industry in order to maintain price stability.”


Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.