As MPC Meets, Marginal Drop in Inflation May Delay Interest Rate Cut

•  FG may issue $2.5bn Eurobond Monday

Obinna Chima

As members of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) commence their last meeting for the year Monday, the marginal drop in October inflation released recently might make the committee members to retain interest rate at 14 per cent.

But some analysts believe that a possible stronger third quarter 2017 Gross Domestic Product (GDP) figures to be released Monday may leave the committee members with no choice but to cut interest rate when they vote on Tuesday.
Nigeria’s headline inflation slowed for the ninth consecutive month in October, declining to 15.91 per cent from 15.98 per cent in September.

In the last 10 months, cumulative inflation was down by 2.81 per cent, which showed that inflation in the country had moderated significantly.

Nigeria’s external reserves have maintained its upbeat since the second half of the year, climbing to $34.330 billion as of last Thursday.

Also, the naira exchange rate has been stable against the United States dollar at N360 to the dollar across various segments of the foreign exchange market. The market has remained stable.

The price of the benchmark Brent crude was at $62.25 per barrel as of Friday.
However, it is worthy of note that the federal government might issue Eurobond of N$2.5 billion Monday, which would be the first tranche of its proposed $5.5 billion external borrowing.

The Minister of Finance, Mrs. Kemi Adeosun, and her team had flown out of the country to host roadshows in London and New York immediately after the Senate granted the government’s request for $5.5 billion foreign borrowing.
Indeed, both Eurobonds that had been issued by the federal government in February and June this year were oversubscribed, given Nigeria’s stable outlook.

To analysts at Lagos-based CSL Stockbrokers Limited, declining Eurobond yields also suggests that the funds may come in cheaper than previous issues.

They added: “So far, and unsurprisingly, there have been little or no worries surrounding investor appetite. Besides funding the 2017 budget. We believe this roadshow marks another step in the government’s efforts to bring down the country’s debt servicing cost.

“The outstanding US$3bn to be raised, also via Eurobonds, are expected to be substituted with maturing domestic short-term papers, which are more costly to service, given higher domestic yields.

“In addition, we expect reduced domestic borrowing by the government to clear the path for interest rate decreases. Recent years have seen rising interest rates fuelled by increased government borrowings. By implication, private businesses have had to incur acutely high debt-servicing costs.

“The final MPC meeting for the year will hold Monday and Tuesday, during which the members will most likely be inclined towards rate cuts. Effectively, we expect to see the re-alignment of fiscal policy (increased fiscal stimulus) with monetary policy (monetary easing), as well as easing interest rates, fuelling economic growth over the course of 2018.”

On their part, analysts at the Financial Derivatives Company Limited (FDC) noted that even though inflation had been moderating, it could swing upwards if there was a surge in money supply and wages increase sharply, causing demand-pull inflation.

“We expect the GDP figures to be reflective of an economy gaining momentum on the path to recovery. While it makes the case for an interest rate cut more compelling, we expect the committee to maintain its wait and see approach and not review current rates until the end of first quarter of 2018,” FDC added.

Analysts at Cowry Assets Management Limited opined that the MPC would retain the benchmark interest rate despite the sustained moderations in inflation rate amid falling food prices, increase in global crude oil prices with attendant boost in external reserves, convergence of multiple foreign exchange rates and the return to and expected sustenance of economic growth.

“Our opinion is partly predicated on anticipated increase in public sector spending, in addition to anticipated increased seasonal household spending amid end-of-year festivities. A key consideration will also be likely increase in interest in the United States amid improving economic developments.“Meanwhile we expect the fiscal authorities to beef up public sector non-oil revenues needed, not only to finance major infrastructural projects, but also to boost its capacity to service its growing debt, reduce the interest expenses to revenue ratio and thus improve its credit worthiness which could have a positive rub-off effect on private sector borrowing cost,” they added.

Also, Afrinvest Securities Limited predicted that the MPC would retain rates at current level, owing to the fragility of the economic recovery and disappointing inflation numbers witnessed so far.

“We, however, note that near term outlook still favours easing as guided by the CBN Governor in recent comments.

Investors are already pricing this expectation into valuation of debt securities, with average bond yield down 110 basis points since January 2017. We believe there is still scope for more rally in thefixed income market as we expect the CBN to cut its benchmark rate in the second quarter of 2018,” they said.