19 January 2015, Lagos – Notwithstanding the continuous threat to stability as oil prices continue to slide, the Central Bank of Nigeria’s (CBN’s) monetary policy committee (MPC) is expected to leave the benchmark interest rate and other monetary policy tools unchanged at the end of its two-day meeting, which commences on Monday.
This is largely because the market has not fully absorbed the effects of the monetary policy measures that were decided at the last MPC meeting.
However, the central bank is expected to continue to aggressively use its administrative tools to support price stability through the use the Open Market Operations (OMO) window to manage the volume of liquidity in the system as well to continue to intervene the forex market to calm the strong volatility observed since last month.
Decisions taken by the MPC influences activities of banks, investment decisions as well as cost of funds in the market.
At it’s last November meeting, the committee had devalued the naira from N155/$1 to N168/$1. In addition, it had widened the band around the midpoint by 200 basis points from +/-3 per cent to +/-5 per cent. Similarly, the monetary policy rate (MPR) was increased by 100 basis points from 12 per cent to 13 per cent, while the cash reserve ratio (CRR) on private sector deposits was also raised by 500 basis points from 15 per cent to 20 per cent with immediate effect. But the CRR on public sector deposits was retained at 75 per cent, just as the net open foreign exchange trading position was left unchanged at one per cent.
The National Bureau of Statistics (NBS) last week put the inflation estimates for December 2014 year-on-year at eight per cent, representing a 10 basis points increase, compared to the 7.9 per cent recorded in November.
The naira has continued to trade outside the official band at the interbank market and has been hovering around N183-N185 to a dollar, while the forex reserves has dropped to about $34.1 billion.
In addition, oil prices which would be one of the factors to determine monetary policy direction has traded largely around $46 per barrel and there are predictions that it could slide further.
But analysts at the FSDH Group argued that a relaxed policy would not be appropriate in the eve of a general election. The general elections holds next month.
“In addition, the current global condition with respect to the declining oil price would not necessitate a drop in rates.
“A restrictive monetary policy stance at this time would further heat-up the domestic financial market and may lead to a loss of confidence. We expect the MPC to maintain a hold on all its policy rates at this meeting,” FSDH added.
Similarly, analysts at Afrinvest West Africa Limited maintained that it does “not expect a deviation from the CBN’s tight monetary policy stance as it convenes for the first time in the year in 2015 next week between 19th and 20th January 2015.”
They added: “Our expectation anchors on the increased volatility in the CBN’s second nominal anchor of monetary policy — exchange rate which may further require tightening cycles if the decline in the crude oil prices persists.”
Also, despite identifying threats from increased political spending and growth in money supply as some factors that are underlining threats to the consumer price index, the Financial Derivatives Company Limited (FDC) also predicted that the MPC the CBN would not be swayed by any decline or otherwise in consumer prices to hike interest rate.
“However, the monetary authority will be careful since further tightening may be detrimental as the general election is less than three weeks from the scheduled January MPC meeting,” it stated.
Nevertheless, analysts at the CSL Stockbrokers Limited stated that its projection for Nigeria’s external accounts suggests that the CBN is likely to devalue the naira again this year, insisting that if not at today’s MPC meeting, the naira devaluation may be later in the year.
*Obinna Chima – Thisday