The MPR is the rate at which the CBN lends money to money deposit banks and which also influences interest rate in the country.
Financial analysts said as Nigerian economy rolls into the last quarter of the year, the rate-tightening regime appeared to have run its full course because the prevailing economic fundamentals have shown that cutting the MPR at this time will not hurt the nation’s economy.
According to one of the experts championing this view, Managing Director, Financial Derivatives Company Limited Bismarck Rewane, the trend these days, especially in the face of the economic realities, favours rate cut, saying Nigeria will not be the first African country to adopt such a soft stance capable of stimulating lending to the various sectors of the economy.
He noted that Kenya and Uganda recently cut their MPR by 350 and 200 basis points respectively.
Citing the current status of macroeconomic indicators in the country as reasons for the anticipated rate cut, Rewane noted that the Nigerian external reserves currently at $41 billion and the prevailing positive real interest rates are in support of a rate cut at the next meeting of the MPC.
According to him, the above scenario, in addition to the moderating inflation rate (although core inflation is sticky), is all in favour of an ease in policy stance.
Experts noted that inflation declined in the month of August by 110 basis points to 11.7 percent, a second consecutive decline.
The nation’s economy has also witnessed a sharp fall in food prices to 9.9% as previous monetary tightening seems to be paying off although analysts say core inflation is still a major threat at 14.7%.
Consequently, the FDC which said that year-end inflation could be lower than previously thought projected that inflation for the month of December could be about 11.8 percent.
Rewane’s optimism was similar to that of the Founder and Managing Partner, Huntingfield Capital, Mr. Onye Nwuka, who said the next stage in the nation’s finance sector is for the monetary policy rate to trend downward.
In his opinion, “The Monetary Policy Committee is confident that the impact of the fuel subsidy cut on inflation will be short-lived. I am inclined to agree and feel that the policy rate has peaked at 12 per cent. I expect a small cut in the rate in the months ahead. The trend in bond yields should also be gently downwards, given this view on inflation and signs of a tighter fiscal stance”.
At its last MPC meeting held in September, the CBN had retained its Monetary Policy Rate at 12 per cent, retaining the plus, minus 200 basis point corridor for the banks to fix their rates.
Also retained was the Cash Reserve Requirement (CRR) at 12.0 per cent and the Net Open Position at 1.0 per cent respectively.
CBN Governor Sanusi Lamido Sanusi had explained that the MPC took the decision to retain the rates as part of efforts to protect the Nigerian economy against the uncertainties surrounding the global economy, noting that there existed potential large inflow of “hot money,” resulting from further monetary easing in the US and Europe and improved yield on fixed incomes instrument in the country.
Sanusi gave further reasons for the MPC decision: “Given developments in the global and domestic economy and the financial markets, the committee noted that the weak global growth indices called for cautious optimism by policymakers.
“The resolution of the euro area debt crises remains a major concern even with the approval of the efforts of the European Central Bank to address the debt crisis in the euro area by the German Constitutional Court.”
He further noted that its decisions at the July MPC meeting appeared to have had some positive impact in a number of areas, namely a deceleration in year-on-year inflation in August 2012, stability of short term interest rates around the Monetary Policy Rate (MPR), buildup in external reserves and stability in the exchange rate. However, core inflation is still high at 14.7 per cent in August.
“The threat of increased inflow of “hot money” arising from the actions of the U.S. Fed to further stimulates the economy through its QE3 activities and its capital reversal implications were noted.
Meanwhile, the FDC has projected a 6.67(+/- 0.12%) economic growth for the third quarter of year 2012.
The projection was contained in the October edition of the company’s monthly economic views delivered at the Lagos Business School.
The company said the projection was based on estimated increase in oil output (2% increases); improved agricultural output due to harvest within the quarter and estimated growth of approximately 8% in non-oil sector.
It also projected an estimated increase of 87.5% contribution to total Gross Domestic Product in the third quarter of the year.
The report said the improved outlook also serves as an incentive for inward investment flows
Current level of FDI in Nigeria is $6.6 billion.
culled from Thisday
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