Going by economic indicators and happenings round the globe, the Monetary Policy Committee (MPC) may not have any reason to reduce the benchmark rate (Monetary Policy Rate (MPR)) when it meets Monday and Tuesday next week.
Although inflation rate is in the single digit and is expected to retreat further, analysts say, the inability of the country to meet its production expectation for the year is one reason the committee may not consider reducing the MPR.
It is believed that, if the benchmark rate is lowered, there might be capital flight and that may worsen the already precarious situation where budget revenue is now lower than what was expected.
According to FDDH Research, the MPC of the Central Bank of Nigeria (CBN) is expected to hold its sixth meeting for the year 2013 between Monday, November 18 and Tuesday, November 19, 2013. It is expected that the MPC will ponder on the state of the global and domestic economy in order to determine the appropriate policy response that will impact the financial system and the Nigerian economy in the short-to-medium term. So far in 2013, the MPC has retained the Monetary Policy Rate (MPR) at 12 percent with the interest rate corridor of ± 2 percent; maintained the Cash Reserve Requirement (CRR) for non-public sector deposits at 12 percent and 50 percent for public sector deposits; Liquidity Ratio (LR) at 30 percent and Net Foreign Exchange Open Position (NOP) at one percent. In its last meeting in September, the committee noted with satisfaction the positive development in the economy: the moderation in inflation rate, stability in the financial system and currency markets. It added that the actions taken by the MPC since its last meeting have yielded their intended effect on stabilizing the exchange rate, while maintaining inflation rate within its target range. Also, it noted that the fundamentals in the economy that influenced its previous decisions had not changed significantly, except that the United States (U.S.) Federal Reserve (Fed) had provided clearer insight into the tapering off of its asset purchase programme.
Our analysis of the developments in the domestic and external macroeconomic environment between the last MPC meeting and now indicates that the drivers of global growth are changing in the external environment, while the domestic environment continues to show positive macroeconomic indicators. Available data from the International Monetary Fund (IMF) World Economic Update (WEO) October 2013 edition indicates that the advanced economies will be the drivers of global growth, as emerging market economies growth path weakens amidst domestic conditions. However, China and a growing number of emerging market economies are projected to remain much above those of the advanced economies but below the high levels seen in recent years. Also, available information from the U.S. shows that that the economy grew by 2.8 percent in third quarter of 2013, but while change in inventories was the main source of expansion, consumer and business spending growth slowed sharply. For Nigeria, it is of note that the 6.18 percent Gross Domestic Product (GDP) growth in the second quarter of 2013 is the lowest in about eight quarters, and whilst we note that there is a need for a better environment to spur higher growth rates, these issues are mostly outside of the scope of monetary policy. Moreover, the ongoing power sector reform and special intervention funds by the government should help to boost the GDP growth rate into the foreseeable future. Thus, the MPC may not be persuaded to cut rate in order to boost growth.
The average Nigerian Inter-Bank Offered Rate (NIBOR) has decreased since the year highs recorded after the last MPC meeting in September. However, the money market was relatively tight in the month of October 2013, compared to end-September 2013 figure. The tightness in the market was due to the maintenance of the tight monetary policy stance of the Central Bank of Nigeria (CBN), the sale of foreign exchange by the CBN and the market sentiment that arose from the fiscal consolidation crisis in the United States (U.S.), which led to the Shutdown of the U.S. government. Consequently, the average money market rates were relatively tight, but lower than the all-year-high rates recorded in September following the implementation of the new Cash Reserve Ratio (CRR) of 50 percent on public sector deposits by the CBN.
The latest inflation rate for the month of September 2013 stood at eight percent, lower than 8.2 percent recorded in August 2013. The inflation rate in September is the lowest in the last five years (since April 2008). Inflation rate averaged 8.7 percent for the first nine months of 2013. Year-on-year core inflation rate (all items less farm produce) stood at 7.4 percent in September from 7.2 percent in August 2013. Inflation rate is expected to remain in single digit for the remainder of 2013, in line with our expectation. We reiterate that despite the single digit inflation expectation, the MPC may not cut rate because of its focus on maintaining foreign exchange rate stability.
The volatility in oil prices in the international market continued to be influenced by the weak prospects for global economic growth, as well as geo-political factors in the Middle East. The Organization of Petroleum ExportingCountries (OPEC) indicated in its Oil Market Report, October edition that an improvement in supply prospects from the Middle East and North Africa (MENA) region and Sudan, along with assurances by major suppliers and international oil agencies that the market was well supplied also dampened the upward pressure on crude oil prices. Also, the shortfall in oil production in Nigeria due to oil theft and pipeline vandalization continues to threaten the revenue projections of the government in 2013. So far in 2013, Reuters Bonny Light price has moved in tandem with the OPEC Reference Basket (ORB), reflecting the current health, as well as the prospect of the global economy. Reuters Bonny Light price stood at $106.60 as at November 11, 2013, which is higher than the budget benchmark of $79/b. Data from the Organization of the Petroleum Exporting Countries (OPEC) shows that oil produced in Nigeria between January and October 2013 averaged about 1.94million barrels per day (mb/d), lower than the 2.53mb/d used to prepare the 2013 budget. Based on the current realities in relation to oil production and exchange rate in Nigeria, the price of oil that will make the FGN to achieve its revenue target in 2013 is around $103.38/b. Given this situation, a rate cut will not be good for Nigerian economy as it may lead to capital flight.