Experts predict CBN holding rate as MPC holds next week

With the stability in foreign exchange market and consistent drop in inflation rate, a group of researchers at FSDH are expecting the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to hold interest rate at 14 per cent and Cash Reserve Ratio at 22.5 per cent.
The Committee Meeting of the CBN meets next week, July 24 and 25, 2017 to decide on its rates.
At the last meeting in May, the MPC maintained interest rate at 14 per cent, retained the Cash Reserve Requirement (CRR) and Liquidity Ratio (LR) at 22.50 per cent and 30per cent respectively.
According to them, “although the need to stimulate economic growth justifies an expansionary monetary policy decision, it would be counterproductive to cut rates given the weak foreign exchange rate and high inflation rate at the moment.”
They urged Federal Government to continue implementing structural policies that support productivity, investment and trade so that nation will not become a dumping ground for other countries.
According to FSDH researcher, the hope that the nation’s economy will exit the current recession has improved further as the manufacturing and non-manufacturing activities increased in the month of June 2017 despite the decrease in the monetary aggregates.
“A review of the latest Purchasing Managers’ Index (PMI) that the CBN published for the month of June 2017 confirms this. The PMI report shows that the Composite Manufacturing Index (CMI) expanded for the third consecutive month in the year 2017 to attain the highest level since March 2015.
“The CMI increased to 52.9 points in June 2017 from 52.5 points in May 2017. The Composite Non-Manufacturing Index (CNMI) also expanded to 54.2 points in June 2017 from 52.7 points in May 2017 to attain the highest level since December 2014.
“PMI below 50 points level suggests a decline in business activity, PMI higher than 50 points level suggests an expansion while PMI at the 50 point level suggests no change. The month of June is the second consecutive month of increase in the CNMI.
“In addition, the Business and Consumer Expectation Surveys that the CBN published for the month of June 2017 show that the confidence of both the firms and consumers about Q3 2017 and next12months has improved.
“In our opinion, the current monetary policy stance of the CBN particularly the increase in foreign exchange supply has contributed to this. A hold decision at this meeting is appropriate to achieve stability. The inflation rate (Year on Year) dropped to 16.10per cent in June 2017, from 16.25per cent in May 2017.
“Thus, inflationary pressure persists in Nigeria and the current and short term outlook on inflation are higher than the CBN target of six per cent – nine per cent,” the report by FSDH said.
They supported Federal government’s decision on Premium Motor Spirit (PMS) price, electricity tariff, and developments in the food market regarding export opportunities remain the downside risks to low inflation rate in the short-to-medium term.
They expressed that a rate cut is not appropriate in lure with the latest production data from the Nigerian National Petroleum Corporation (NNPC) shows that Nigeria’s average oil output decreased by 12.09 per cent to 1.60million barrel per day (Mbpd) in March 2017, from 1.82mbd as at February 2016.
“The global economic growth recovery signals a positive impact on crude oil prices, but the possibility of excess global supply still persists. Thus, a rate cut is not desirable given these conditions and the impacts on exchange rate in Nigeria,” they explained.