The Monthly Inflation Report for August was released Friday, just before the Monetary Policy meeting scheduled for September 19-20 2016.
A poll of some market analysts’, traders and business professionals concludes that there is no expected change in regards to interest rates, so the initial reaction will come from any surprises in the vote count. Beyond the conclusion of the poll, additional comments are listed below:
- “To cut, not sure, DMO/CBN just borrowed money at elevated rates. So easing is expected”
- “It will take more than 12 months to get out of this mess *controlling for inconsistencies from country and CBN leadership*”
- If MPC cuts rate, “not that banks will pass lower rates to borrowers anyway. Let’s not waste our time”. Let’s just keep rates up
If Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele (GE), sustains his “take a stand and act now” stance with his vote for a rate hike, keeping the tally of hawks above the doves, the naira (NGN) will be pressured. All attention will be focused on this as most analysts are unsure of what to expect from GE. They have speculated that the GE led CBN is likely to neutralize the MPC outcome with a policy reversal directive after a few days. Hence the distrust and clear stand-off by foreign investors.
We (RANDOF) don’t see a reason for that to happen at this particular meeting considering the usual “previous decisions need time to crystallize” view after every price hike irrespective of the movement in the CPI or GDP numbers. However, since we are not privy to all the information that will be considered at the meeting, we cannot rule out another rate hike. The addition of the August Inflation report by the National Bureau of Statistics (NBS), makes this event more volatile, and the outcome of the Monetary Policy Summary will dictate the direction of the NGN.
The MPC is strongly influenced by macroeconomic data and the inability of the of the apex bank to push through its desire for a market driven exchange rate. This weakens the currency fundamentally, however, the MPC cannot ease rates until they see inflation trending consistently lower. In the near term the NGN has the potential to weaken further as the market reprices the MPC’s and GE’s expectations.
The NGN has seen weakness in recent months as expectations of reduced capital control get pushed out further into the future due the sustained macroeconomic and policy uncertainties.
Inflation: We expect prices to remain high by year end with an optimistic moderation between September and October. It should be noted that the anticipated high inflation rate is due to the structural shift in the year-on-year series. The month-on-month series is expected to positive. We expect the inflation rate to increase marginally to 17.8% in September before moderating to back to 17.6% in October, 17.9% November and 17.7% in December.
Exchange Rate: The major downside to the NGN is the negative impact of the low global oil prices on the terms of trade coupled with inconsistent policy responses by the CBN. This is has kept the need potential foreign portfolio flows out of reach. We do not see any change in sight and believe the inconsistencies around the exchange rate and the capital controls is unlikely to end under the GE’s led CBN. Hence, the NGN is expected to lose more value and may touch N500/$ before the next MPC meeting in November 2016. The festivities FOREX demand in December is likely to make this worse.
Economic Growth: A double-dip recession is on the cards. It is our view that there is likely to be a slight relieve in the third quarter economic data (mainly due to improved seasonal agricultural output) but this will be a short-lived recovery, followed by another recession.