MPC Meeting: Tough Decision Awaits CBN, as Inflation Drops to 18.12%
Mixed Sentiment prevailed on Global Stocks, amidst report of early tapering of stimulus by the Federal Reserve
This week, the global market under our coverage closed par with seven gainers and losers, as signs of inflationary pressure building upon the world’s biggest economy kept investors worried about monetary policy tampering.
Also, another data released this week by the U.S Labour department showed the number of Americans filing new claims for unemployment benefits dropped further below 500,000 last week.
Consequently, two of the three broadest market indices in the U.S, which includes the DJIA Index, and the S&P 500 lost 0.51% w/w and 0.43% w/w respectively, save for the Nasdaq Composite Index that gained 0.31% w/w, as minutes of the Federal Reserve meeting last month indicated some policymakers thought it would be appropriate to discuss the easing of crisis-era support, such as tampering bond purchase in the upcoming meeting if the strong economic prospect is sustained.
Similarly, the major market around Europe, German DAX, and France CAC 40 grew by 0.14% w/w and 0.02% w/w respectively, except UK FTSE 100 Index that lost 0.36% w/w.
Also, three of the four major markets in Asia, which includes Japan Nikkei 225, Hong-Kong HANG SENG Index and India S&P appreciated by 0.83%w/w, 1.54%w/w, and 3.71%w/w respectively, except China Shanghai Composite Index that declined by 0.11%w/w, amid reports of a resurgence of Covid-19 cases in the region.
Furthermore, mixed sentiment prevailed in the emerging market indices under our coverage, South-Africa FTSE/JSE Index, Argentina MERVAL Index, and Brazil’s BOVESPA gained 0.26%w/w, 2.50%w/w and 0.58%w/w respectively. While Egypt EGX 30 lost 0.33%w/w.
We expect to see some mixed recovery in the next trading week in reaction to the Federal Reserve monetary policy tampering and U.S President Joe Biden’s tax agenda.
MPC Meeting: Tough Decision Await CBN
The next MPC meeting is scheduled to be held on May 25 and May 26, where the eleven (11) members of the MPC committee will convene at the CBN headquarter to review and make critical decisions on the direction of key monetary policy variables for the next two months.
At the last MPC meeting held in March 2021, the committee members by a vote of six (6) to three (3) voted in favour of retaining the monetary policy parameters:- the MPR at 11.5% and the asymmetric corridor of +100/-700 basis points around the MPR; the CRR at 27.5%: the Liquidity Ratio at 30% so as to continue the management of the various intervention programmes deployed to help stimulate the economy into full recovery
On this note, we have taken our time to review the recent developments in the economy since the last MPC meeting, with a view of projecting what the outcome of the MPC meeting will be as the economy gradually makes full recovery from the coronavirus pandemic.
Happenings Since the last MPC meeting
Inflation rate marginally declined in April: One of the core functions of the central bank is to maintain price stability in the economy by the use of key monetary policy indicators. According, to the last CPI inflation report for April 2021, Nigeria’s headline inflation dropped by 5 basis points to 18.12% (Y/Y) from 18.17% (Y/Y) in March 2021. This represents the first decline in inflation rates after surging for 19 consecutive months since August 2019.
Rising crude oil price as the global economy recovers: Crude oil price (bonny light grade) appreciated by $3.86 from $61.71 on March 23, 2021, to close at $65.57 as of 20th May 2021. In addition, Nigeria’s oil production increased from 1.48 million barrels per day in March 2021 to 1.55 million barrels per day in April 2021 to meet the rising global demand for crude oil as countries continue to recover from the coronavirus effect on the back of the pace and the effectiveness of the vaccination programmes amid the resurgence of the virus in India the fifth largest economy in the world and the largest importer of Nigeria’s crude oil.
The equity market in a bearish mood: Between the last MPC meeting in March and 21st May 2021, the local bourse recorded negative sentiment impacted by investors’ sustained profit-taking in the bellwether stocks. Precisely, the Nigeria Exchange All-Share-Index (NGX-ASI), which tracks the performances of the equities in the capital market lost (0.98%) between the last MPC meeting in March and Friday 21/05/21. Also, the year to date (YTD) of the NGX-ASI reduced to (-4.83%) from (-4.69%) before the last MPC meeting in March 2021.
Dwindling foreign reserve despite the increase in crude oil price and production level: Although, Nigeria’s crude oil price and production increased during the period between the last MPC meeting and 21st May 2021, the foreign reserve weakened by $246 million from $34.60 million between the last MPC meetings to $34.35 billion as at 20th, May 2021. The decrease in the foreign reserve could be attributed to the central bank’s gradual clearing of the alleged $2billion demand backlog of foreign portfolio investment (FPI) by foreign investors and manufacturers in the foreign exchange market.
Unstable foreign exchange rate– Between the last MPC meeting and Friday, 21st May 2021, the naira depreciated by ₦2.20 against the dollar from ₦409.80 to ₦412.00 at the Importer & Exporter (I&E) window while the official rate of the naira was uncertain as it cannot be determined from CBN’s official website, leading to speculation about the further devaluation of the naira.
From the above analysis, it is obvious there are more negative factors to be considered by members of the committee than positive factors. Yet, given the limited option available to the CBN- Reduce, Retain or Increase, we are of the view that the more members of the committee will likely vote to increase the MPR (deducing from the three dissenting votes to increase in the last meeting).
An increase in the MPR will help combat the high inflation but will consequently increase the cost of capital, impede economic recovery and new investments needed to create more employment.
However, a reduction in the MPR will further reduce the cost of capital, facilitate new investments and more employment in the real sector, which will further stimulate the economy but will put more demand pressure on the foreign exchange market
Nigeria’s Headline Inflation Marginally Declined to 18.12% in April 2021
In line with the official data released by the National Bureau of Statistics (NBS) on Monday, May 17th, 2021, the Headline inflation rate (a measure of the average change in the general price level of goods and services in the economy) for April stood at 18.12% year-on-year, from 18.17% in March 2021, which represent a marginal decrease of 0.05% than the previous month.
Also, on a month-on-month basis, the headline declined by 0.97%, which is 59bp lower than March’s record of 1.56%.
The decline in the Headline rate was majorly influenced by a slight fall in Food Price inflation (a sub-component of the Headline index), which decreased by 1.00%, from 22.95% in the previous month to 22.72% (The first decline in Food inflation since August 2019). However, the Core Inflation rate (Non-Food price inflation sub-component) increased by 12.74% y/y, which shows a 7bps higher than the 12.67% recorded in March, and the month-on-month core index likewise decreased by 0.07%.
In addition, the Urban inflation rate declined by 18.76%, which denotes 8bps lower than 18.76% computed for March, while the rural inflation rate also stood at 17.57%, representing 3bps lower than the previous month.
Finally, the marginal drop in inflation as a result of the decline in food price inflation does not signify that commodities in the market have not appreciated, but that there was a decrease in the rate of price increase in March than April. This serves as a wake-up call to the Government and relevant authorities to take necessary measures and implement policies needed to ensure the inflation rate subsides further.
Equity Market Ended The Five trading Sessions in the Red Zone, As NGX-ASI Plunged by 2.93% w/w
Transactions on the Nigerian Equity Market closed w/w on a negative note, as bears dominated all of the five trading sessions. This we believe was a result of investors’ sustained sell-off in large and medium capitalised stocks. Consequently, the Market Indicators (NSE-ASI and NSE Market Capitalization) slumped by 2.93% w/w to close for this week at 38,324.07 absolute points and N19.98 trillion compared to 39,481.89 absolute points and N20.58 trillion last Friday. This nominally translated to a week-on-week loss of N603 billion in Market Capitalization value.
The Oil and Gas Sector closed positively with a percentage of (+7.39%), while the remaining four major sectors closed negatively, led by the Industrial Sector (-3.34%), Banking Sector (-1.53%), Insurance Sector (-0.74%), and Consumer Goods Sector (-0.03%).
ETERNA emerged the best performing stock this week with a w/w gain of +21.21%, while CILEASING shed -18.80% to emerge as the top loser.
A total turnover of 1.05 billion shares worth N11.54 billion naira in 17,218 deals were traded this week by investors on the floor of the Nigerian Stock Exchange as against a total of 840.33 million shares worth N9.56 billion naira in 13,232 deals
Twenty-six (26) equities appreciated during the week, higher than Thirty-three (33) equities in the previous week. Forty-one (41) equities depreciated, lower than nineteen (19) equities in the previous week, while ninety-four (94) equities remained unchanged, higher than one hundred and nine equities (109) equities recorded in the previous week.
We expect the mixed sentiments to persist in the coming week, in reaction to possible decisions at the CBN MPC meeting scheduled for next week.
FOREIGN EXCHANGE MARKET
The Naira this week remained unchanged against the USD at the official window to close the week at ₦379/USD as against the previous week, while at the I&E FX windows, the USD closed the week at ₦412.00/USD against ₦411.67/USD from last Friday position.
In the meantime, the foreign reserves this week weakened by $227.30 million to the level of $34.35 billion (20/05/2021) from $34.58 billion (11/05/2021), as the Brent Crude oil price also declined by $2.27 pbl w/w from $68.71 pbl last Friday to $66.44 pbl.
Source: GTI Research