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Exotix Capital forecasts interest rate cut in H2

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Exotix Capital forecasts interest rate cut in H2

 

Despite predicting a likely increase in inflation in the second half of the year due to what it describes as “election-related expenditure and fiscal slippage,” one of the leading firms in frontier and emerging markets, Exotix Capital, has said that it is expecting the Central Bank of Nigeria (CBN) to reduce interest rates during that period.

In a note obtained by New Telegraph, the firm said it was expecting the apex bank to reduce the benchmark interest rate-the Monetary Policy Rate (MPR)- as part of measures to stimulate domestic demand ahead of the 2019 election.
The firm, which maintained its December 2017 forecast that Nigeria faces fragile economic recovery this year, argued : “While GDP growth has turned positive, it remains low and driven primarily by a recovery in the oil sector and will require a greater effort on behalf of the Federal Government to diversify the non-oil economy.”

According to Exotix Capital, although inflation has maintained a downward trend, it: “remains high and persistent.”
It adding : “We suspect that an increase in inflation is likely towards the latter half of the year fuelled by election-related expenditure and fiscal slippage.”

The firm stated : “We expect a cut in Nigeria’s Monetary Policy Rate in the second half of 2018 in an effort to spur domestic demand ahead of the election, notwithstanding the likely rise in inflation during this period.”
Besides, it said: “In fact, we believe that a slight easing of MPR to try to boost domestic demand, especially non-oil demand, would be well justified, a subject on which we have previously written.

Our models, however, suggest that this would not be likely until Consumer Price Index (CPI) were to fall to around 12%, and have thus suggested that we were unlikely to see a cut in rates during 2018. While we continue to believe that CPI is unlikely to reach these levels during the year (and indeed think that CPI is likely to begin creeping up), we have now revised our estimate to suggest a rate cut in the latter half of 2018. This estimate is based on our conversations in Lagos and Abuja in January. We believe that the Monetary Policy Committee (MPC) will likely cut rates in an attempt to stimulate growth ahead of the election.”

However, the financial advisory firm pointed out that given that the MPC is faced with the challenge of fighting stagflation, “that is both high unemployment (perhaps as high as 20%) and structural inflation which has only been exacerbated by FX depreciation pass-through” , it expects the Committee, “to hold policy rates, to limit inflation while hoping for growth to return to combat unemployment, as long as it remains politically feasible to do so, and ultimately succumbing to political pressures by cutting rates.”

The experts noted that with the stability of the NAFEX window leading to an increases in Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) coupled with, “ record levels of reserves ($42.8bn at time of writing), the need to attract US$ through high domestic rates has subsided.”

Interestingly, another leading financial advisory firm, Renaissance Capital (RenCap) had a few weeks ago predicted that the CBN will cut interest rates by two-percentage points in the first quarter of the year.
The firm had stated that the rate cut would help complement the authorities’ efforts to reduce interest rates on treasury securities by raising the share of foreign debt in public debt.

Similarly, in their recent note, analysts at Financial Derivatives Company Ltd (FDC) said that the steady decline in inflation increases the chances of the CBN cutting interest rates. They, however, pointed out that with no end in sight to the standoff between the Senate and the Executive arm of government resulting in the former refusing to confirm new MPC members, the uncertainty about when the Committee will form a quorum and hold its first meeting of the year looks set to continue.

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