Pre-MPC Communique of Jan 19 - 20 2015

8/9/2019 Pre-MPC Communique of Jan 19 - 20 2015

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Monetary Policy CommitteeDecision Preview January 19 - 20, 2015

The Monetary Policy Committee (MPC) will hold its first meeting for the year on Monday and

Tuesday (January 19 - 20, 2015). During this Meeting the Committee is expected to review local

macroeconomic performance for Year-2014. This review will also take into consideration events

in the global environment in the stated period. On the global front, two dominant themes loom

large, namely; weaker oil prices and a continuing divergence among leading economies.

Unrelenting slide in oil prices

Having traded as high as $117.70 a barrel in June, the price of Bonny light crude oil has fallen

precipitously over the last six months and ended 2014 at just under $60 a barrel its lowest

level for over five years. With the weakness in oil prices continuing this year and even

quickening, a redistribution of income from producers to consumers has ensued - proving a

bane to the former and providing a boon to the latter.

Marked disparity in the global economy

Widening economic and policy divergences have punctuated the global landscape, and created

a multi-speed global economy. Thus, while the US appears to have achieved a moderate,

sustainable growth pathin 2014, China entered a phase of managed slowdown with growth

rates stabilising below its recent historical average. Meanwhile, in Europe and Japan, the

spectre of recession and deflation remains. These divergent trends pose downside risks,

particularly with respect to volatility in financial markets as interest rates in major economies rise

on varying timelines.

The combination of these risks, among others, prompted the World Bank to lower its global

growth forecast for 2015. In its latest assessment released on 13

th

January 2015, the globallender projected the global economy will grow 3% in 2015, lower than a forecast of 3.4% made

in June 2014.


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Nigeria Macroeconomic Trends

On the domestic scene, deliberations will centre on the following macroeconomic indices:

Exchange Rate

Naira closed at its weakest level on record in the fourth quarter of 2014, and remains vulnerable

to further upside pressure, owing to weak oil prices, shrinking foreign reserves and domestic

capital flight. At the interbank market, the exchange rate stood at N184.10/US$ as at 12th

January 2015, representing a depreciation of 3.62% from the closing rate of N177.67/US$ on

November 28, 2014. At the CBN window, the local unit has remained stable at N168/US$ since

the last meeting. Following sustained weakness over several weeks, the CBN issued a new

foreign exchange regulation on 17th December 2014 aimed at supporting the local unit. The

CBNs circular reviewed net open position limit (NOPL) on foreign exchange trading positions of

banks at the close of business, from 1.0% of shareholders funds (SHF) unimpaired by losses to

zero. The apex bank, in a later circular, dated 12th January 2015 reviewed the foreign currency

trading position limit to 0.1% of SHF. It further directed that dollars bought from the interbank

market could be held only for up to 72 hours, after which they must be sold back to the CBN at

its own day rate. By this regulation, the CBN seeks to curtail commercial banks ability to hold

foreign exchange position, and subsequently limit foreign currency trading.

Foreign Reserves

The slump in oil prices below $60 per barrel, along with increased RDAS demand, has

undermined foreign exchange inflows and depleted external reserves. Between the end of

November 2014 and January 12, 2015, the nations external reserves shed 6.28% to close at

$34.49 billion. The external reserves which were $43.5 billion at the beginning of 2014 dropped

to $34.47 billion as of December 31, 2014. The current level of external reserves is estimated to

cover between 6 and 7 months of imports.

Inflation

Inflation edged slightly higher in December, driven by a higher reading on the food (farmproduce & processed food) sub-index. More specifically, headline inflation increased to 8%

year-on-year (y-o-y) in December, up marginally from Novembers reading of 7.9% y -o-y.

Inflation has remained remarkably stable throughout 2014 and December marked the 24th

straight month in which price increases remained in single digit territory, and within the CBNs

target range of 6-9%. The food (farm produce & processed food) sub-index increased by 9.2%


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y-o-y in December, compared to 9.1% y-o-y a month earlier. Meanwhile, the all items less farm

produce sub-index (so-called core CPI, which is closely tracked by the CBN) finally reflected

some movement after four months of constant readings. Core CPI inflation declined to 6.2% y-

o-y in December, 0.1 percentage points lower than Novembers reading .

Source: NBS, CBN and FMDQ

Liquidity

Tight naira liquidity following the implementation of the new Cash Reserve Requirement (CRR)

led to the overnight lending rate increasing to 30% in the week ending December 5 from 12%

previously. The rate rose further to 70% on Monday (December 8), before gradually declining

thereafter. On December 11, the rate had declined to 20%, although it increased to 43.5% thefollowing day as the CBN once again debited commercial banks accounts.Average interbank

lending rates have since stabilized in 2015 and now hover between 12% and 14%.

Source: CBN and FMDQ

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

Q1

13

Q2

13

Q3

13

Q4

13

Q1

14

Q2

14

Q3

14

% GDP Growth Rate

6.00

8.00

10.00

12.00

14.00

16.00

18.00

Jan-1

4

Feb-1

4

Mar-1

4

Apr-1

4

May-1

4

Jun-1

4

Jul-1

4

Aug-1

4

Sep-1

4

Oct-1

4

Nov-1

4

Dec-1

4

Jan-1

5

%MPR Inflation Rate NIBOR-90

140145150

155160165170175180185190

Jan2014

Feb2014

Mar2014

Apr2014

May2014

Jun2014

Jul2014

Aug2014

Sep2014

Oct2014

Nov2014

Dec2014

N/$ Official Interbank

42.9940.11

37.83

38.14

36.96

37.23

39.40

39.5939.52

38.76

36.80

34.4734.49

-

5.0010.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

45.00

55.00

65.00

75.00

85.00

95.00

105.00

115.00

Jan2014

Feb2014

Mar2014

Apr2014

May2014

Jun2014

Jul2014

Aug2014

Sep2014

Oct2014

Nov2014

Dec2014

Jan2015

$ Bn$ pb External Reserves Crude Oil Price


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Our Position

Following the review of global and domestic economic trends, we anticipate the Monetary Policy

Committee may likely make the following decisions:

Retain Monetary Policy Rate (MPR) at 13% while leaving the +/-200basis pointscorridor unchanged: A hike in MPR is unlikely to sway foreign investors during this

election period and in an environment of strengthening US Dollar. If anything, raising the

MPR will undermine the central banks stated wish of increased lending to the private

sector. In addition, inflation remains within the CBNs target band, although upside risks

to inflation exist in 2015. These include the increased spending in the run up to the

February 14, 2015 general election and the pass-through effect of the Naira devaluation

and its attendant impact on import prices.

Retain the Cash Reserve Requirement (CRR) on private and public sector funds at20% and 75%, respectively: Market liquidity concerns are likely to be tempered by

frequent CBN interventions, particularly issuance of Open Market Operation (OMO) bills.

Hold the Net Trading Position Limit at 0.1%: This will further help shore up the value

of the Naira.

Leave Liquidity Ratio unchanged at 30%.

Maintain official naira exchange rate at a mid-point of N168/$ around the 5%

corridor.

Additionally, we expect the Committee to extensively discuss the rising dollarization of

deposits in the banking system.

The Economic Intelligence Unit

Access Bank Plc

Pre-MPC Communique of Jan 19 - 20 2015

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