• Analysts weigh options
The Central Bank of Nigeria (CBN) begins its first meeting in 2021 today with the apex bank’s monetary policy decision-makers expected to consider its monetary tools and make crucial decisions on benchmark interest and other monetary rates.
The Monetary Policy Committee (MPC) of the CBN is expected to decide on the Monetary Policy Rate (MPR), which was retained at 11.50 per cent at the last meeting in November, last year.
The decisions of the apex bank, which are expected to be announced at the end of the two-day meeting tomorrow, Tuesday, January 26, 2021, are expected to have ripple effects across the markets. A decision to hold rates may retain the current market trend in favour of equities, but a hike in rates could moderate quoted equities’ rally in favour of fixed-income market.
The MPC traditionally reviews the developments in the domestic and global economies and the state of the financial markets, especially the domestic market, while making possible projections on the outlook as guidance for its decisions.
Cordros Group, a major investment banking group, said it expected the apex bank to hold the MPR unchanged.
According to analysts at Cordros, although rising inflationary pressures alongside fragilities in the balance of payments present a strong case for monetary tightening, it is rather too early for such a stance given the need to support economic recovery.
Analysts noted that monetary tightening would contradict previous heterodox policies targeted towards improving the flow of credit to the real sector of the economy and prolong the recovery phase.
“Monetary policy tightening will also create severe financial market turbulence and amplify deficit financing pressures for the government. On a balance of factors, we believe the Committee will keep policy rates unchanged and affirm the use of unorthodox measures such as CRR debits, Loan-to-Deposit Ratio (LDR), and direct intervention in employment-stimulating sectors to influence macroeconomic outcomes and ultimately attain macroeconomic stability,” Cordros stated.
Analysts agreed that apex bank’s decisions will greatly influence the direction of Nigerian stocks in the days ahead.
United Capital Plc said the direction of quoted stocks will be determined by monetary policy decisions.
United Capital noted that monetary authorities might continue to use monetary policy measures available to salvage their economies from the potential damage of the COVID-19 pandemic, continuing the trend in 2020 when central banks took centre stage to provide emergency support facilities while adopting a broadly loose policy stance in line with global realities.
“In 2021, we expect monetary policy actions to remain broadly accommodative to spur growth and limit the impact of the pandemic from evolving into a W-shaped growth outcome in the face of limited vaccination for Africans as well as fiscal policy vulnerability. We imagine that monetary authorities will further ease or maintain policy rates at current level till second quarter 2021 to allow the economy to recover fully before contemplating tightening from third quarter 2021,” United Capital stated.
Analysts at Financial Derivatives Company (FDC), led by Bismarck Rewane, however, highlighted the possible pressure on the apex bank to adjust its hold-down position and increase benchmark interest rate as inflation surged by its largest rise in eight years to 15.75 per cent.
FDC stated that continuing rise in inflation will be a major issue at the MPC, noting that the apex bank cannot be oblivious to a rate of inflation which is now almost seven per cent above the upper limit of its inflation range of between six and nine per cent.
“It, therefore, may consider tightening before the meeting or symbolically increasing the rates of its special bills, currently at 0.5 per cent per annum,” FDC stated.
The National Bureau of Statistics (NBS) in its latest inflation report had shown that upward pressure on domestic consumer prices remained unabated for the 16th consecutive month. Headline inflation rose from 14.89 per cent in November 2020 to 15.75 per cent in December 2020, the highest since December 2017 and largest increase since January 2012.
FDC stated that it expected increase in the headline inflation in January, a view common among analysts.
Analysts at Cordros Group, which had correctly predicted the inflation rate for December 2020, predicted that headline inflation will rise to 16.10 per cent in January 2021.
Cordros Group outlined that pre-existing structural constraints, continued impact of the marginal hike in electricity tariffs and a relatively low base in the prior year have set up continuing rise in inflationary trend.
Afrinvest West Africa Group noted that the trend in consumer prices reflects continued weakness in the agriculture sector as the harvest season should normally drive reduction in food prices.
“In the immediate term, we foresee sustained pressure on consumer prices on the back of the extended weakness in the agriculture sector and the increase in electricity tariff, for which implementation has commenced in January 2021,” Afrinvest stated.
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