By Babajide Komolafe

BREAKING: CBN technically devalues naira in I&E window

DEMAND for higher yield on treasury bills has added to the pressure for an upward review of the Monetary Policy Rate (MPR) by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) at the end of its meeting holding today and tomorrow.

Last week, the N150 billion secondary market (Open Market Operation, OMO) treasury bills (TBs) auction conducted by the apex bank recorded ‘no sale’ outcome as investors demanded for higher rates to factor in the risk of naira devaluation as well as further rise in the inflation rate.

At the last OMO auction held on March 5, 2020, the CBN sold N110 billion worth of 364-Day bills at stop rate of 12.99 percent.

But investors wanted more than 12.99 percent yield on 364-Day OMO bills given further increase in the annual headline inflation rate to 12.2 percent in February from 12.1 percent in January. Thus the demand for higher bid rates which prompted the ‘no sale’ outcome of the OMO auction held by the apex bank last week.

However, given that the apex bank reliance on OMO bills to continue to attract dollar inflow from FPI, the demand for higher rates on TBs coupled with the continued rise in inflation may compel an upward review of the MPR one year after it was reduced by 50 basis points to 13.5 percent by the MPC.

The above prompted analysts at Financial Derivatives Company Limited (FDC) to project a 50 bpts upward review of the MPR by the MPC.

They said: “With the widening spread of COVID-19 that has led to several countries closing their borders, and the commencement of the planting season, the supply of goods will drop significantly, creating shortages that will push up prices. These, coupled with slowing growth and a looming recession threat make determining the right policy decision, a herculean task. The CBN has announced a support fund of N50 billion to be disbursed to households and companies affected by COVID-19. Amidst all these are the growing pressures in the forex market. The CBN will have to be ready to make some hard choices to weather the storm. A likely outcome is that the committee could increase the MPR by 50bps to 14 percent in order to reduce inflationary pressures.”

O their part, analysts at Vetiva Capital ruled out a reduction in the MPR saying, “In the ongoing month, we expect the headline inflation to print at 12.30 percent, year-on-year, y/y led by both food and core price pressures.

We expect both the food and core inflation for Mar’20 to come in at 15.08 percent y/y and 9.52 percent y/y respectively as food prices continue to be pressured by seasonality while core price pressures could stem from the health and transport sectors.

The softer outlook for inflation expectation leaves no room for monetary policy accommodation in the coming months as the slump in oil prices has put the country in a critical situation.Therefore, we believe the CBN will be more focused on the transmission of its unconventional policies to the economy rather than opting to lower the benchmark interest rate to stave off a coronavirus-induced recession.”


External Reserves fall to $35.9bn
Meanwhile the nation’s external reserves fell further to $35.94 billion Thursday last week from $36.16 billion Thursday the previous week.

This represents the lowest level of external reserves since November 2017 when the reserves stood at $38.209 billion.

Recall that the reserves, after falling persistently for seven months, from peak of $47.989 billion on July 5, 2018, to $42.296 billion February 28, 2019, commenced steady upward trend which peaked at $45.175 billion on June 10, 2019.

But after four weeks fluctuation which ended on July 5 at $45.149 billion, the reserves commenced nine months downward trend which resulted to $9.2 billion or 20.4 percent decline as at March 19, 2020.
The sharp decline in reserves was due to decline in dollar inflows from Foreign Portfolio Investors (FPIs), and increased dollar sales by the CBN in order to defend the naira.

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