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MPR to stay unchanged on sustained risk of capital flow reversals – analysts

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By Chioma Obinagwam
Ahead of the Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN) on the 23rd through the 24th of July, 2018, analysts at Afrinvest West Africa- a wealth advisory firm, have forecast the committee retaining the current Monetary Policy Rate(MPR).
According to analysts at the wealth advisory firm, the decision to retain the MPR will be premised on rising yields on emerging market assets – resulting from downside risk factors consequent on sustained foreign capital flow reversals since second quarter 2018 (Q2:2018).
Other reasons why the apex bank(CBN) may decide to retain the rate, the pundits say, may be attributed to the flimsy domestic economic recovery, steady moderation in inflation, polity fragilities and disquiets around fiscal spending ahead of the 2019 General Elections amid concerns on policy normalisation in global systemic central banks.
“As the MPC must keep a delicate balance between growth and price stability, we believe the Committee will maintain status quo on all policy rates in order to avoid upsetting the current economic momentum,” Afrinvest disclosed.
“Our position is on a balance of factors underscored by careful analysis of sustained positive conditions in global commodity markets alongside emerging market risks and continued disinflation amid steady but weak growth momentum,” the analysts added.
Although continued disinflation and positive external conditions create a compelling case for a rate cut in order to stimulate currently weak growth momentum, the analysts noted that the CBN has already eased liquidity conditions considering lower yields in the fixed income market.
They are of the view that the argument for cutting the MPR now will only be for policy consistency but were quick to add that although rates will converge, the impact will be negligible.
They said, “In addition, risk factors to exchange rate stability, which we believe is the current policy anchor, in light of ongoing capital outflows may tilt the scale towards a hawkish stance. Nevertheless, monetary tightening is a potential downside risk to growth though it may attract and sustain capital flows.”
Afrinvest stated that a neutral position gives the CBN opportunity to assume a position which would not be inimical to the twin goals of growth and price stability.
Furthermore, the analysts continued, the CBN retains its flexibility which could prompt quicker responses to emerging conditions in global financial markets as they affect external sector stability.
“Given these considerations, we believe the MPC will retain status quo on all policy rates. Indeed, we expect rates to remain unchanged for the rest of  in the second half of 2018 (H2:2018) as the window for a rate cut is increasingly narrowing on polity fragilities. The uncertainty usually associated with change of government in Nigeria will become full blown in H2:2018 ahead of the 2019 General elections as foreign investors are likely to flee for ‘safer haven’ economies,” they said.
“Although there are arguments in favour of tightening considering the threat of shrinking interest rate differential between Nigeria and advanced markets, which makes naira assets less attractive, we believe the Committee will shy away from this as the CBN could deploy other monetary policy tools (OMO) to achieve this without tweaking MPR,” they predicted.
Consequently, activities in the financial market will remain dictated by global and domestic macroeconomic conditions.
 Whilst money market rates are continuously moderating both at the primary and secondary markets, investor appetite seems to be shifting towards shorter term bond instruments as recent sell-offs have resulted in the normalisation of the sovereign yield curve.
Rate regularisation, especially at the Treasury bills end of the market, appears to be paving the way for more corporate debt issuances, notably commercial papers.
However, they argued, the equities market will remain pressured by capital flow reversals on key risk concerns, notwithstanding stable macroeconomics and improving fundamentals of companies.

 

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