FX, inflation possible consideration for a ‘hold’ as MPC meets Monday
The Monetary Policy Committee (MPC), chaired by the Central Bank of Nigeria (CBN), would be meeting for the third time this year on Monday and Tuesday, to decide the direction of interest rate and other macroeconomic indicators.
Ahead of the meeting, analysts in the financial services sector and other stakeholders are expecting the CBN to maintain a status quo on its Monetary Policy Rate (MPR), despite marginal drop in inflation rate.
Most of the analysts polled by Businessday point to persistent rise in inflation, (though, reduced marginally in May), and transparency in foreign exchange (FX) harmonisation as major considerations for a ‘Hold’ decision at the meeting.
“Still-high inflation and what could emerge as tentative FX market reforms will likely keep the CBN on hold at the May meeting,” Razia Khan, managing director, chief economist, Africa and Middle East Global Research, Standard Chartered Bank, says.
She says of greatest interest perhaps will be the plan to boost liquidity and transparency of the Investors and Exporters (I&E) window, and any official confirmation of the harmonisation of Nigeria’s FX rates.
Nigeria’s inflation rate marginally retreated for the first time in 19 months to 18.12 percent in April from 18.17 percent recorded in March 2021, according to the National Bureau of Statistics (NBS).
This confirmed the optimism of Godwin Emefiele, the CBN governor, who said at the MPC meeting in March that inflation would moderate in May.
“We would not lose sight of inflation. Inflation may move up in April but we expect inflation to begin to moderate from May. By that time, we should have our Q1 GDP numbers and we hope it shows significant growth and then we begin to attack inflation,” Emefiele said in March 2021.
Analysts at Fbnquest say persistent high inflation remains a key concern for monetary policy. At the last MPC in March, the committee retained all parameters and reiterated its stance that inflationary pressure was mainly due to legacy structural factors across the economy and not largely associated with monetary factors.
On his part, Olusegun Akintunde, analyst at Polaris Bank, expects the committee to maintain status quo and continue with its various policies aimed at strengthening growth given the slowdown/ moderation in headline inflation.
Consequently, the MPC voted to retain monetary policy rate (MPR) at 11.5 percent, retain asymmetric corridor of +100 and -700 basis points around the MPR, retain cash reserve ratio (CRR) at 17.5 percent and retain liquidity ratio at 30 percent.
Ayokunle Olubunmi, head, financial institution ratings at Agusto Consulting, a pan-african credit rating agency, states, “In view of the
prevailing macroeconomic condition, we believe the MPC will keep the key parameters constant. Notwithstanding the marginal 0.05 percent reduction in the inflation rate for April, we believe concerns about increasing the pressure on the exchange rate will restrain further stimulation of the economy.”
The CBN last week removed the official exchange rate of N379 per dollar from its website, as it adopted the I&E window at the official rate. However, the CBN’S official rate still remains at N379 per dollar as of May 10, 2021, on the homepage of FMDQ website.
Khan says it would bring fiscal benefit to Nigeria, helping to boost the nairavalue of any dollar-denominated revenue from oil.
Additionally, it would allow the FX rate to act as a ‘shock absorber,’ by compensating for the weakness of oil earnings.
However, Khan notes that it is unlikely to be inflationary itself, as most goods are priced off at a far higher dollar-naira rate.
“If official devaluations were accompanied by measures to boost the functioning of the I&E window, it would ultimately help Nigeria’s economic recovery,” she states.