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With Emerging Markets Turmoil, Renewed Inflationary Pressure, CBN Likely to Raise MPR

September 16, 2018

Kekenapep –

Obinna Chima

There are strong indications that the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) which meets less than 10 days from today, will raise its benchmark monetary policy rate (MPR) in order to wade off spill over from the turmoil in emerging markets (EMs) as well as to tame inflationary pressure.

Russia’s central bank last week raised its main interest rate for the first time in almost four years, following Turkey in taking steps to defend its currency amid emerging market turmoil.

The Bank raised its benchmark lending rate by 0.25 percentage points to 7.50 per cent. The rouble, which has also been battered by worries over US sanctions and other political pressure on Russia, rallied on the announcement and traded as much as 0.8 per cent stronger at Rbs67.64.

Precisely, the next MPC holds between September 24th and 25th 2018.

Nigeria’s Consumer Price Index, (CPI) which measures inflation increased by 0.09 per cent to 11.23 percent (year-on-year) in August, compared to the 11.14 per cent recorded the preceding month, the National Bureau of Statistics (NBS) revealed on Friday. That was the first year-on-year rise in headline inflation after 18 consecutive disinflation in the index.

However, stock markets as well as currencies in EMs such as Argentina, Turkey, South Africa, Brazil, Mexico, Egypt, South Korea, Philippines and China, have plunged heavily in the past few weeks, even as the naira has remained stable.

EMs across board have been under pressure since the US Federal Reserve raised interest rates in June.

Governments and companies had borrowed in dollars when interest rates were low, and the dollar was weak. Now the dollar is strong and interest rates are rising.

The MSCI Emerging Markets Index of shares is down more than 13 per cent in 2018.

Similarly, the Nigerian Stock Exchange (NSE) market capitalisation has fallen by 13.5 per cent in 2018.

In addition, Nigeria external reserves is down by five per cent this quarter, to its last Thursday’s close of $45.228 billion.

Owing to these developments, there are strong indications that the MPC may hike interest rate.

CBN Deputy Governor, Dr Joseph Nnanna, last month hinted about plans to increase the interest rate in response to higher inflation ahead of the general elections in February 2019.

According to Nnanna, virtually all members of the MPC had supported the idea, that “the Monetary Policy Rate should increase if inflationary pressures build up.”

Nnanna had said, “These factors would warrant a rate increase to send the right signal to the public, that the central bank will tighten policy to respond to higher inflation. There’s a scope to raise rates before the elections in February.

“The central bank is still in the mood for tightening. How fast are we going to tighten is what members haven’t agreed upon.” Nnanna said while policy tightening by the United States Federal Reserve was a concern, investors still saw Nigeria as an attractive market, thanks to the stable naira and the yield curve on fixed-income instruments higher than in the US or Europe.

“I am not worried about reversal of capital flows. If any investor wants to exit the market, we shall meet them at the door and write a cheque and give them their money,” he had added.

Also, speaking in a chat with THISDAY last night, an analyst at Agusto & Co, Jimi Ogbobine, said a hike in interest rate would be majorly driven by movement of foreign portfolio investments (FPIs)

“If the MPC feels that FPIs movement is getting volatile, to forestall sell-off of assets, it will increase interest rate,” he explained.

But analyst at Ecobank Nigeria, Mr. Kunle Ezun, disagreed, saying “I am not sure the central bank will want to go that route.”

Research Analyst at FXTM, Lukman Otunuga, pointed out that the simmering trade dispute between the world’s two largest economies had also fuelled global risk aversion while a brutal sell-off in the EM space rattled investor confidence.

He said with fears mounting over a full-blown trade war triggering global instability and negatively impacting growth, emerging markets especially remain under extreme pressure.

“Throughout the third quarter of 2018, Nigeria has kept afloat with GDP expanding 1.5 per cent during second quarter (Q2) and inflation easing 11.14 per cent. Although the nation’s external reserve dropped to the lowest since March to $45 billion, it still remains at manageable levels.

“With oil prices somewhat supported by geopolitics and the naira displaying a degree of stability against the Dollar, the outlook looks somewhat encouraging. However, external risks in the form of an appreciating dollar, prospects of higher interest rates and trade tensions could cripple Nigeria’s fragile recovery,” Otunuga explained.


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