Coronation Research – a part of Coronation Merchant Bank Group – has said it doubts that the Central Bank of Nigeria (CBN) will raise its Monetary Policy Rate (MPR) above 14.per cent per annum this year.
The firm stated this in its interest rate outlook for the year released yesterday. “The CBN is aware of the risk of outflows of foreign investment in naira money market instruments and the threat of pre-election spending that will most likely feed through to inflation in H2 2018.,”!it said.
“For these two reasons, we think that the CBN will raise its open market operation (OMO) rates to achieve an annual yield of 14.00%-15.00% by Q4 2018, from 13.20% per annum (pa) recently. However, we doubt that it will make an overt signal by raising its Monetary Policy Rate (MPR) above 14.00% pa this year.”
The Coronation Research report entitled: “Interest rate outlook, 2018” examined the current yield on government-issued or central bank-issued one-year bills of three groups of emerging market/developing countries: a) Brazil, Russia, India and China (BRIC) countries; b) selected emerging markets with double-digit inflation; and c), selected sub-Saharan African countries.
In each case, the current yield on the government securities was compared with the domestic inflation rate as an indicator of how much currency depreciation, against the US dollar, an international investor might expect.
Noting that conditions for emerging market currencies have deteriorated in the last two months, the firm pointed out that few emerging markets can take their exchange rate for granted, adding that in some cases market interest rates have risen.
“Nigeria offers a one-year risk-free rate of 0.72 pp over its inflation rate. In as much as the Central Bank of Nigeria (CBN) wishes to keep interest rates down, we believe that it will have to raise market interest rates by Q4 2018,” the firm said.
According to Head of Research Guy Czartoryski, “a significant part of Nigeria’s Naira-denominated risk-free securities are held by foreign investors and logic suggests that CBN must increase interest rates dramatically to keep the investors.
However, we believe the CBN will keep interest rate rises to the minimum, while allowing a degree of foreign exchange reserve deterioration if foreign investors either sell or do not renew their Naira fixed income positions ahead of elections in February 2019. We think that the CBN would tolerate a degree of parallel exchange rate deterioration, if this results”.
The noted that Nigeria will have to offer a higher interest rates more than what the market currently offers to attract international investors looking for a return, and lock in domestic funds that might otherwise go to the foreign exchange market.
“Rather than have market interest rates trend down with inflation, we believe that in H2 2018 the CBN will seek to increase the spread between inflation and the one-year risk-free rate, which it effectively sets with its OMO rate,” the firm stated.
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