Analysts Rule Out Interest Rate Cut, MPC Decides Today

By Nume Ekeghe

As members of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) conclude their two-day meeting today, some economists and financial market analysts have predicted that all the monetary policy tools would be left unchanged.

They, however, stressed the need for the committee to focus on introducing policies that would encourage investments as well as help control inflationary pressure.

The analysts made this prediction yesterday in separate interviews with THISDAY.

At the last MPC, the committee had retained the benchmark Monetary Policy Rate (MPR) at 12.5 per cent; the cash reserves requirement was also retained at 27.5 per cent and the liquidity ratio at 30 per cent respectively.

The Head of Research at United Capital, Mr. Wale Olusi, advised the MPC members to focus on bringing down inflation as well as to push for policies to drive and encourage foreign investments in order to improve forex liquidity.

Olusi said: “I doubt there would be changes, but definitely, the dislocation in the system is worrying. The rising inflation rate at 13.2 per cent at the moment and the fact that it is going to be higher in September is anti-growth and is likely to deepen the recessionary tendencies.

“There is no way the CBN would be able to attract foreign capital if the interest rate is at the level it is now when compared to inflation rate. We have serious economic problems with growth which contracted by six per cent at the second half of the year and we have serious issues with forex liquidity considering the fact that trade deficit is deepening and import is twice the size of export.

“So, there is no way you are going to be able to sustain your import bill if something drastic is not done about attracting foreign capital or cutting down on import.”

The Chief Investment Officer, Sigma Pensions, Mr. Pabina Yinkere, said: “At the September 2020 MPC meeting, I expect the committee to leave all parameters unchanged. We observe that the focus now is on how to catalyse economic growth in the wake of COVID-19 and the resultant slump in Q2 2020 GDP numbers.

“In this view, price stability may likely take the back seat as the CBN continues to pursue low interest rates and its drive to increase bank lending to the real sector of the economy. As such the MPC may be willing to sacrifice the current rising inflation for growth at this time.

“Since the CBN began its use of the loan-to-deposit ratio to encourage banks to lend, we have seen an increase in lending to various sectors of the economy, which is a welcome development, and as such expect the CBN to double-down on this and other growth-stimulating measures.”
Also, the Head, Investment Research at Afrinvest, Mr. Abiodun Keripe, said the most pertinent focus should be on the forex environment.

According to him, “I expect the committee to maintain status. The CBN has been using other unorthodox measures to achieve its price and financial stability objectives. I do not expect a rate cut due to the need to balance these objectives following continued inflationary pressures and forex challenges on one hand, and negative economic growth on the other.

“A rate cut potentially has implications on private investment and capital mobilisation needed to support the massive domestic financing gap. The investment climate is dealing with negative real returns with the August inflation rate at 13.2 per cent. The current inflation pressure is driven by structural challenges such as border closure, food shortages, VAT increase, and the on-going energy reforms.

“Reducing the MPR does not help to resolve these issues. On the flip side, tightening would hurt the need to stimulate real sector growth via credit expansion given that the economy is running at a risk of recession already.”

An investment professional, Mr. Ayodeji Ebo, also anticipated that the MPC would not adjust all its monetary policy instruments.

Ebo explained: “The CBN would still maintain the status quo because since the last time they adjusted nothing significant has changed and there is a limit to what the MPC adjustment or policy can do. To that end, I feel they would still retain all parameters at the current level.”