Interest rate cut imminent, says FSDH Merchant Bank

A fresh hope, amid muted talks on the possibility of the much-anticipated interest rate cut was raised yesterday, as a report by FSDH Merchant Bank, affirmed that economic indices are currently pointing the direction.

According to the lender, the expected drop in the inflation rate and the relative stability in the foreign exchange market should encourage the monetary policy makers to take the bold step this quarter to stimulate growth in the economy.

The report, titled: “Economic and Financial Markets Outlook (2018 – 2022)”, also forecasts the biggest Real Gross Domestic Product (GDP) growth rate of 3.16% for the country in 2018 and 4.09% in 2019.The bank’s Head of Research, Ayodele Akinwunmi, however, said with the population growing at 2.75%, the country requires growth rate in excess of five per cent to substantially improve the wellbeing of Nigerians.

He noted that these expectations will only be realised if the rising trend of international crude oil prices and the level of local production of the commodity remain stable.Besides, the monetary policy normalisation in the advanced economies and reversal in the current trend of inflation rate also pose other risks.

Expressing optimism in the resurging fundamentals, he pointed out that the combination of the monetary policy easing, drop in inflation rate and stability in the foreign exchange market would continue to put a downward pressure on yields on the fixed incomes securities.He said there are more factors in favour of stability or appreciation in the value of Naira than depreciation in the value of Naira.

The development, he said, will lead to growth in credits to the private sector, rebound in the activities in the corporate bond market, increase in the issuance of commercial paper and a growth in the equity market.

“FSDH Research expects the inflation rate to drop to a single digit in June 2018, if there is no adjustment to the price of Petroleum Motor Spirit and electricity tariff…We expect the inflation rate to average 10.62% in 2018 from an average of 16.55% in 2017,” he said.

Listing the factors that would drive the inflation rate down, he again pointed to the availability of foreign exchange to meet consumption and production purposes; and improved oil production and local substitution strategy, as well as, increased local food production.

For the equities market, he said there is an expectation of strong rally in the first half of the year, as quarterly analysis of the segment in the last seven years showed that it appreciated consistently in second quarter.“We attribute the appreciation in Q2 to the release of full year earnings and corporate actions during the period,” he said.