Uncertainties Heighten as CBN Keeps Policy Tools on Autopilot
Uncertainties in the Nigerian economy heighten as the monetary authority suspends its meeting scheduled for November meeting. The apex bank first postponed its bi-monthly meeting in September amidst worsening macroeconomic indicators.
The move has left policy direction on autopilot, experts said while reacting to continued decisions of the monetary policy committee of the Central Bank of Nigeria (CBN)
Investment firm, Cordros Capital Limited expects the monetary policy committee of the Central Bank of Nigeria to develop another hawkish feather ahead of the last meeting for 2023.
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is expected to in November after failing to have its September policy meeting, following the appointment of the new Governor.
Analysts said since the last MPC meeting in July, the monetary policy space has changed rapidly, given some orthodoxy introduced by the CBN, particularly since the beginning of October.
In its update, Cordros Capital said the significant changes include removing the maximum limit on the Standing Deposit Facility (SDF) and OMO auctions.
After about eight months of hiatus, the CBN eventually auctioned OMO bills on 10th August. The decision came in a bid to drive FX inflows into the market.
“Irrespective of how frequent the OMO auctions become going forward, we think the aim is to serve dual functions of mopping up system liquidity and attracting foreign portfolio investors (FPIs)”, Cordros Capital said in its macroeconomic update.
The investment firm said as system liquidity dries up because of the frequent OMO auctions, local yields will increase, making naira assets more attractive.
Supporting the notion of mopping up system liquidity, the CBN quietly removed the N2.00 billion maximum limit the banks can deposit on an overnight basis under the SDF, analysts said.
MarketForces Africa recalled that Cordros Capital flagged the previous limit as a downside risk to ensuring the effectiveness of narrowing the asymmetric corridor around the MPR to +100/-300bps from +100/-700bps at the July policy meeting.
Thus, with the removal of the limit, the SDF averaged NGN278.99 billion from NGN55.00 billion, weakening banking system liquidity and inducing higher overnight lending rate.
On inflation, domestic price pressures sustained their uptrend, settling higher at 27.33% as of October with pressures stemming from both the food and core baskets.
Elsewhere, currency pressures remain intact, with local players remaining the key drivers of the volumes in the Nigerian Autonomous Foreign Exchange Market (NAFEM) since the beginning of the year.
“We understand that offshore investors are beginning to show some interest, possibly due to the OMO auctions and growing optimism that the CBN has started to deliver some of the outstanding FX forwards.
“We think the foregoing will significantly impact the Committee’s decision at its November policy meeting. Notably, we believe that further rate hikes will send a strong message that the apex bank is not relenting in its inflation fight, particularly as near-term inflation expectations are tilted to the upside, potentially reaching a 28.02% Year-on-year peak in December”.
Analysts said they think that maintaining the MPR at current levels will not be synchronous with the lingering increase in the market interest rates.
Investment banking firm Cordros Capital had predicted that the Committee will likely favour a further increase in the MPR to align with the recent market interest rate increase – More so that the benchmark interest rate remains the key signalling tool for market interest rates and inflationary pressures have remained intact.