‘How oil price may affect rates in economy’
In the lender’s “2019 Macroeconomic Outlook” report, due to be released today, it forecasts oil price at an average of $58 per barrel for 2019, a situation, when realised, will stoke not only fiscal crisis, but also raise issues for monetary policy management.
The bank’s Head of Research, Guy Czatoryski, while speaking with select financial journalists in Lagos, on Monday, noted that average oil price much below $58 per barrel means the CBN will have to keep rates very high and could even challenge the Naira-dollar exchange argument.
Meanwhile, bank’s profits may still remain caged this year, as they are unlikely to experience much loan growth, given the weak economy and the fact that they can only benefit from high Treasury bill yields.
“On the other hand, bank stocks are cheap in historical terms. So, if interest rates come down later in the year, and the market conditions improve, then there could be a sharp rally in bank stocks later in the year,” he said.
According to him, the “current exchange rate of N365.48/$ is likely to prevail this year,” adding that the CBN’s policy to defend the exchange rate, with reserves now at $43 billion, is effectively in a vantage position.
“An average of about $60 per barrel means the CBN will feel confident about the currency, and will be able to cut rates later in the year, maybe in fourth quarter (Q4), but less likely in third quarter (Q3).
“We think the CBN will supply dollars to the foreign exchange markets at an average rate of $500 million per month during 2019. This is compatible with maintaining a strong reserve level.
“If, as we think, the oil prices will average $58 per barrel this year, then we think the CBN will want to keep interest rates high. It will do this through its Open Market Operations (OMO). We think OMOs will be issued in a range of 17 per cent to 19 per cent, and Treasury bill rates will be very close to this level during 2019.
“When we look at Nigeria in the international context of interest rates, the treasury bill rates look competitive in the context of other emerging market rates, which is why the CBN is having success in attracting inflows of Foreign Portfolio Investment,” he said.
However, he said if oil trades at substantially above $60 per barrel during 2019, then foreign investors in Treasury bills will be encouraged, and CBN might well be in a position to cut rates in Q4 2019, or even in Q3 2019.
Czatoryski said this can be achieved by downtrend in inflation, which has however, been “stubborn” and trended around 11 per cent over the past few months.
While hopeful that growth will be 2.25 per cent in 2019, he expressed worry that consumer demand is very weak and not expecting an uptick in the immediate future, especially as government’s expenditure does not vary much from year to year, citing the 2019 budget currently considered at N8.83 trillion against ongoing 2018 plan at N9.12trillion.
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