Motionless MPC on the Horizon

September 18, 2019/Cordros Capital

On Monday next week, the Monetary Policy Committee will commence its two-day monetary policy meeting in a period of broadly steady global economic momentum – but with increasing downside risks related to the trade war between U.S and China and currency routs in emerging markets – and mixed domestic landscape.

On the global front, policy environment remains tight, with the U.S Fed strongly committed to further interest rate hikes before year end, in addition to the two implemented thus far.

Elsewhere in emerging markets, following massive assets sell offs and sharp slide in local currency, Turkey and Argentina hiked benchmark interest rate by 625bps and 1500bps to 24% and 60% respectively.

On the domestic scene, even as economic growth remains positive, together with stability in the different strata of the currency market, slower growth in Q2 and renewed inflationary worries, combined with the unrelenting capital flight, should leave the Committee unease.

In our view, whilst fragile growth, depressed consumer spending, and the need to stimulate domestic investment present a substantial case for a rate cut, we think the case is negated by the rising liquidity profile, with attendant risk to FX reserve and currency stability.

On the flip side, while the renewed headline inflationary pressure combined with continued apprehension of foreign investors towards naira asset have increased the possibility of a rate hike, we believe that decision would further impede the CBN’s recent effort at directing credit to the employment elastic sectors via the Differentiated Cash Reserve Requirement (DCRR) and Corporate Bonds (CB).

Overall, amidst persistent capital flight and renewed inflationary worries, we expect the MPC to hold its policy parameters unchanged, while leveraging on the OMO channels to continue liquidity management.

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