Surprise, Cautious Optimism Greet July MPC Decision


Emefiele, Deputy Governor, Economic Policy, CBN, Sarah Alade, and Deputy Governor Corporate Services, Suleiman Barau, at a recent MPC meeting in Abuja

Finance Minister, Kemi Adeosun

President, Manufacturers Association of Nigeria (MAN) Dr. Frank Jacobs

The recent decision of the monetary policy committee of the Central Bank of Nigeria to hike MPR rate by 200 basis points to 14 per cent has attracted the attention of economic analysts and real sector operators, who have expressed divergent opinions, report Kunle Aderinokun, James Emejo and Olaseni Durojaiye

Rising from its two-day meeting last Tuesday, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) took decisions to respond to some of the major factors affecting the economy. Of all the major factors, unabatedly rising inflation is a worrisome factor militating against the economy.

As part of its core mandates, the CBN is expected to ensure monetary and price stability and in so doing, it must put inflation under control. And that was why when its MPC was confronted with two policy options to take- to restart growth or fighting inflation- it resolved to tame inflation to defend the naira. The committee was particularly concerned that headline inflation spiked significantly in June 2016, approaching twice the size of the upper limit of the policy reference band.

The committee noted that inflation had risen significantly, eroding real purchasing power of fixed income earners and dragging growth. The Consumer Price Index (CPI) which measures inflation rose by 0.9 per cent to 11-year high of 16.48 per cent in June compared to 15.58 per cent in May. This was after it had jumped to a nearly six-year high of 13.72 per cent in April from 12.77 per cent in March.

According to the National Bureau of Statistics (NBS), energy prices, imported items and related products are persistent drivers of the Core sub-index while the highest price increases were noticed in the electricity, liquid fuel (kerosene), furniture and furnishings, passenger transport by road and fuel and lubricants for personal transport equipment.

As such the CBN’s MPC at the conclusion of its July meeting last Tuesday, raised the MPR, the benchmark interest rate by 200 basis points to 14 per cent from 12 per cent. The committee, however, left the cash reserve ratio and liquidity ratio unchanged at 22.50 per and 30 per cent respectively as well as retained the Asymmetric Window at +200 and -500 basis points around the MPR.

Addressing journalists at the end of the two-day meeting of the Monetary Policy Committee in Abuja, CBN Governor, Godwin Emefiele, explained that five members voted to raise the MPR while three others voted to retain the rate at 12 per cent. Only eight members of the committee were present at the meeting.

According to him, the committee was torn between supporting growth and fighting inflation but eventually settled for the defence of the naira, partly because the apex bank “lacked the instruments required to directly jumpstart growth, and being mindful not to calibrate its instruments in such a manner as to undermine its primary mandate and financial system stability, in assessment of the relevant issues.”

He added that the high inflationary trend which has culminated into negative real interest rates in the economy and discouraged savings was also a major concern in arriving at the conclusion to further tighten MPR.

The MPR is the rate at which the apex bank lends to commercial banks and usually determines the cost of funds in the banking system.

Analysts React

However, with inflation currently at 16.48 per cent amid rising cost of funds to the real sector and its attendant unemployment challenges and negative foreign trade balances as well as the stark reality of an impending recession, most economic analysts and real sectors, who spoke with THISDAY expressed shock at the resolve of the MPC to further raise interest rate. Nevertheless, a few of the analysts are in support of the MPC decision.

Economist and ex-banker, Dr. Chijioke Ekechukwu, who is Managing Director, Bristol Investment Limited, said the increase in rate will only benefit the government and further increase the cost of doing business.

He said: “The Monetary Policy Rate(MPR) is the rate at which CBN lends to commercial banks. This increase of MPR to 14 per cent from 12 per cent by 200 basis points was expected of the Monetary Policy Committee of CBN against the backdrop of the increase in inflation rate to 16.5 per cent. The effect of this increase is that banks, whether commercial, merchant, Mortgage or Micro Finance Banks, will jerk up their lending rates to their own customers for both existing and new credit facilities.

“This will further increase the cost of doing business and a resultant effect in the high prices of goods and services. The benefit of the increase in MPR is only to the government whose lending rates to banks should not be expected to be far lower than inflation rate. To the average Nigerian however, the increase of MPR means higher prices of goods and services. This will deepen the inflationary trends.”

Also, economist and former Managing Director, Unity Bank, Muhammed Rislanudenn, said tightening could lengthen the contraction of the economy amid the 2016 budget implementation woes.

According to him the renowned economist: “MPC argued that they have two options, that of trading off growth to address inflation and negative interest rate thereby encouraging foreign investors or leaving rates on hold while waiting for fiscal authorities to implement 2016 capital budget and help stimulate the economy by jump starting it towards growth and away from recession. They opted for the former because as they argued they have no control on the fiscal side.”

He said: “I do not think further tightening will do any magic as cost of borrowing will go higher, negative interest rate will remain given inflation rate of 16.5 per cent and new MPR of 14 per cent and contraction might remain for longer period given government’s difficulty in implementing 2016 capital budget due to erosion in projected income as well as delays in securing loans needed to deal with budget deficit. To mitigate such challenge, CBN can come out with more intervention funds targeted at specific growth and employment enhancing sectors at single digit interest rate.”

In the same vein, Associate Professor of Finance and Head, Banking and Finance Department, Nasarawa State University, Keffi, Uche Uwaleke, said the hike in MPR offers little prospect for recovery.

He said: “In my humble view, the outcome of the MPC meeting inspires little prospects for early economic recovery. I had expected some easing of monetary policy or at the worst an unchanged MPR in view of the slump in GDP. With the benchmark rate jumping from 12 to 14 per cent, the CBN has clearly chosen to focus on inflation rather than growth. Unfortunately, this approach will most likely miss the target.

“The banks will be the worst hit as the increase in MPR will automatically lead to another round of credit squeeze within the system. For a government that is desirous of encouraging the growth of SMEs, I wonder how this move would help an economy that is technically in recession.

“The decision to increase the MPR will also jerk up the cost of servicing the country’s domestic debt as bond yields go up. The stock market will be impacted negatively as equities become less attractive to portfolio managers as an asset class due to increase in bond yields and fall in bond prices. In the coming days and weeks, without a counter fiscal stimulus, I expect to see a bearish stock market.”

Also, registering his disappointment of the increase in interest rate at this point in time, Executive Director, Corporate Finance, BGL Capital Limited, Mr. Femi Ademola, said the rate hike could only serve to further fuel inflation and cause declines in production due to higher cost of operation.

He said: “I am still at a loss of words to express my shock at the action of the MPC. My expectation was that in order to give the economy a breather, the MPC would go for monetary easing. However, it appears that they are focused on the exchange rate volatility with the mistaken believe that it is due to liquidity surfeit. I believe it is due to dearth of local substitutes for imported goods. And if there were excess liquidity in the banking sector, a targeted withdrawal through OMO would have been a better option at this time.

“By this action, the real sector will continue to suffer credit crunch due to high cost and the economy may further contract. On the other side, yields on fixed income instrument would increase providing opportunity for investment in our local treasuries and bonds. However, I think existing investor will suffer losses by marking to the market but new cash will get a good bargain. I am also not sure if this will attract foreign investors considering that the foreign exchange market has not been stabilised yet.

‎”Finally, if the target of this action is to check inflation, I think it may work to other way, further increasing inflation and production declines further due to high cost of operation.”

Similarly, analysts at Time Economics stated that the decision was against their expectation.

Notwithstanding, they posited that, “On the bright side, we are of the view that tightening the MPR which will reduce negative real interest rate will come as good news particularly for foreign portfolio inflows. It will also help to stabilize the Naira in the currency markets which is one of the core mandates of the CBN.”

The analysts, however, added that, “ the latest move is very unlikely to curtail today’s inflationary pressures since the factors driving the current increase in general price levels are largely cost-shocks and not demand related.

“Secondly, given the nature of Nigeria’s financial system, interest rates generally paid on savings by commercial banks in Nigeria are usually not dependent on the benchmark Monetary Policy Rate. Therefore we think that savings account holders who have seen the real returns on their savings wiped out by rising inflation are unlikely to be beneficiaries.

“Furthermore on the downside, we also think the move could not only help to exacerbate the current difficult operating environment for firms but would also lead to an increase in cost of funds for net borrowers and thus dampen corporate investments.”

The Chief Executive Officer, Global Analytics Derivatives Consulting, Tope Fasua, said he aligned with most analysts that “the decision is a bit shocking.”

According to him, “Increasing MPR at this point will increase the pains of businesses especially because the banks are known to rapidly increase lending rates while deposit rates lag. The CBN is aware of this. The flip side is whether this will have a salutary impact on bringing inflation down. Again, that is doubtful. Nigeria’s leaping inflation is cost-push, not demand-pull. Businesses are passing on the higher cost of dollars, of inputs and everything else, to the consumer where they can. Nigerians are going through dire straits.

“I think the strategy is risky, but not entirely a CBN matter. They are caught between the rock and a hard place. This is the culmination of procrastination on the fiscal side, and a disheartening dissonance in government that has led to business closures and the rest in the last 14 months.”

While the representative of the real sector stated that the decision “will not help the economy” a research analyst with a Lagos based economic advocacy group added that “the decision portends a lose-lose situation.”

While speaking with THISDAY, President of the Manufacturers Association of Nigeria (MAN), Frank Jacobs, explained that the new hike would further deny the real sector access to funds, lead to more companies closing shop or reducing capacity utilization as well as hurt the economy.

Jacobs opined that hiking MPR rate at a time when the real sector was calling for a lower lending rate for the sector through the creation of a special window in order that the sector can be competitive in the international market would jeopadise the attempt to diversify the economy.

“I believe an increase in lending rate will affect production capacity of members of the Manufacturers Association of Nigeria (MAN); it might even lead to some of the companies cutting down on capacity utilisation. Already, we’re canvassing the Federal Government to come up with a special window for the manufacturing sector to access fund at a lower interest rate of between three to five per cent as it obtains in other climes; the increase now means the whole idea to diversify the economy is going to be a mirage because how will people get the money to set up industries, or expand their current industry in order to diversify the economy. The policy will not help the economy. It will not help job creation and it will not help wealth creation; it’s not the best,” he added.

In an interpretative note obtained by THISDAY, analysts at Meristem Securities stated that it anticipated a northward trend in yields in the medium term as assets are re-priced and highlighted the potentially negative impact of the more attractive yield environment on the equities market.

The note from Meristem Securities further stated that “banks will be boosted by Non-Funded Income Generation. The MPC maintained the status quo on the cash reserve and liquidity ratios, meaning that from a regulatory standpoint, this policy pronouncement will be positive for banks (specifically for liquid banks).

“We expect that liquid banks will boost gross earnings through non-funded income generation by investing in fixed income assets as market yields are affected upwards by the hike in the Monetary Policy Rate (MPR). Fixed income instruments become more attractive We note the current average yields across the Nigerian Treasury bills and bonds, which pegs at 15.42 per cent and 15.84 per cent accordingly, while also considering the stop rates at the last Treasury bills auction held Wednesday, 20th July of 14.14 per cent, 15.48 per cent and 16.48 per cent for the 91-day, 182-day and 364-day instruments accordingly,” it added.

However, Oyelere kicked against the decision of the MPC tame inflation as against reflating the economy and argued that doing so was wrong and portend a “lose –lose” situation for the economy.

“The decision to hike the MPR clearly was based on taming inflation. We can’t opt for inflation targeting at a time the economy is contracting. I think members of the committee didn’t prioritise well. What need to be targeting now is reducing cost of lending and not increasing it. Secondly, the inflation that we’re trying to manage is cost induced and which doesn’t necessarily imply that there is excess money in circulation. This will not restrict the economy; it will rather create arbitrage around other financial instruments,” he argued.

Oyelere and analysts at Meristem Securities aligned with Jacobs on the implication to the real sector .

On his part, Oyelere insisted that “The implication is that the real sector cannot access fund at a reasonable rate. When you hike benchmark lending rate, prime lending rate and other lending rates will go up. If this happens the economy may further contract; if we’re not careful we will keep having increasing unemployment.”

As Oyelere posited, analysts at Meristem Securities stated that, “the hike in benchmark interest rate will negatively impact the cost of borrowing to the real sector as banks re-price current interest rates on existing loans. We note that this will particularly affect the small-medium enterprises, hindering expansion plans and thus necessitating the need to pass-on the higher operating costs to consumers.”

However, Managing Director, Chief Economist, Africa, Global Research, Standard Chartered Bank, Razia Khan, noted that the MPC decision was in line with the bank’s expectation.

Pointing out that, “given the cost-push nature of inflation in Nigeria, which largely stems from the shortage of FX, we believe that this was the right thing to have done,” she enthused that, “today’s monetary policy decision demonstrates a commitment to FX liberalisation, which alone will undo some of the bottlenecks that have contributed to inflation.”

Khan said, “while the CBN framed its internal debate as choosing between growth and inflation, we believe there is no meaningful long-term trade off.” “ Establishing more credible policy and attracting greater inflows is about as pro-growth as policy can be, given the challenges currently facing the Nigerian economy. Today’s tightening was an important step in re-establishing the credibility of monetary policy in Nigeria, and should allow for a gradual recovery in FX inflows.

“The asymmetric band around the MPC was not altered from its current +200bps/-500bps, disappointing our expectations of a significantly higher floor to rates. However, with the MPR tightening, the rate on the CBN’s standing deposit facility does move higher, to 9 per cent from a previous 7 per cent. This is still meaningful.”

She added: “The CRR was kept unchanged at 22.5%. Given weak oil prices and output, we do not see excessive liquidity growth in the Nigerian economy.

There’s no immediate rationale for a much higher Cash Reserve Ratio, not least because a more market-determined, inevitably higher USD- NGN rate will keep the spotlight on bank NPLs and capital adequacy ratios. Any further rise in the CRR would only have added pressure to the banking system, with little effect on alleviating the FX shortage.”

“In all, we think this was a good outcome to the MPC meeting. As Nigeria embarks upon the path of reform (FX liberalisation, fuel price deregulation, transparency initiatives, efforts to boost revenue mobilisation, power sector reforms), all with a view to easing the economy’s transition to lower oil prices, and creating the foundation for more sound long-term growth, we think that today’s MPC decision represented an important initial step in the right direction. The decision to raise the monetary policy rate despite growth concerns will give investors a clear signal on the authorities’ intent to sustain FX reforms. This should be well-received.,” she concluded.

Aligning with Khan, Macroeconomic and Fixed Income Research Analyst at FBNQuest, Chinwe Egwim, was hopeful that “this hike will not have an acute adverse effect on banks’ lending rates to the real economy, ” The committee, according to her, expressed satisfaction in improved credit lending by banks to the private sector.

Besides, Egwim added: “It seems the committee has handed over the responsibility of jumpstarting the economy to the fiscal arm as it tilted towards allowing fiscal policy some space to stimulate output.

“The hike in MPR by 200basis points to 14 per cent indicates that inflationary pressures were of great concern. Given the current headline inflation figure, real yields across the curve are negative (on an average of -0.7).”