What Next for Monetary Policy Committee

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For holding the interest rate steady after six consecutive meetings, monetary policy appears to have reached its limit, writes Obinna Chima

Last week, the Central Bank of Nigeria’s (CBN’s) Monetary Policy Committee (MPC) retained all its key monetary policy instruments. That would be the sixth consecutive meeting that the benchmark monetary policy rate (MPR) would be left at 14 per cent, a situation that has heightened the clamour for loosening of the tight monetary conditions.

Arguments to loosen the tight monetary conditions became stronger given the relative improvement in the foreign currency and slowing inflation. According to the proponents of interest rate reduction, the move would help in the federal government’s quest to revive economic activities and support growth.

But the central bank believes that its position would help cement its victory over the scourge of inflation, which had eroded living standards in the country.

According to CBN Governor, Mr. Godwin Emefiele, the committee assessed the global and domestic economic and financial environments in the first five months of 2017 and the outlook for the rest of the year.

On manufacturers’ call for reduced interest rates, he pointed out that it was not only manufacturers that had called for lower rates.

“Even I want a low interest rate but the economic aggregates that we see today, unfortunately, do not give room for us to begin to look at the direction of signalling a downward interest rate.

“Both the IMF and World Bank are advocating a tightened monetary policy. But rather than tightening, we have decided to hold and watch, given that we had embarked on a consistent policy tightening before we decided to adopt the hold policy.

“And it is because at that time we saw that inflation went as high as 18.6 per cent. And we have data to support the fact that once the inflation rate in Nigeria goes above 11.5 per cent, growth is retarded.

“So we decided to anchor inflation and I am very delighted that since around January, we have begun to see a downward movement in inflation,” he said.

He also stated that the central bank cannot determine what the convergence point of the various forex rates would be, adding, however, that based on the indicators, the rates were already converging.

On how far the CBN would go in sustaining its market interventions, he said: “I have said it and I will repeat myself that the interventions will be more vigorous than before to underscore the fact that we are determined to ensure that the Nigerian economy recovers, by making sure that foreign exchange is being made available to operators of the economy to conduct their businesses.”

Speaking on the forex window for investors, Emefiele said he was gratified that over $1.1 billion had been attracted to the forex market through that window.

The central bank made the interest decision same day the National Bureau of Statistics released the first quarter of the year (Q1 2017) Gross Domestic Product report, showing that Nigeria’s GDP contracted by 0.52 per cent (year-on-year) in real terms, indicating five consecutive quarters of contractions since the Q1 2016.

 Support for ‘Wait and See’ Approach

To analysts at Lagos-based CSL Stockbrokers Limited, attempt to loosen monetary policy now would truncate the fragile improvements seen in the currency and in inflation.

“Moreover, a rate cut aimed at stimulating demand could make things worse for the economy, as it would likely lead to a widening current account deficit, worsen inflation, exacerbate foreign exchange shortages and push real interest rates deeper into negative territory,” they added.

Also, analysts at Ecobank Nigeria Limited urged the CBN to sustain and deepen its foreign exchange management policies. They noted that by keeping the MPR steady, “we do not expect secondary market yields to shift considerably from their current levels over the short term. Bond yields would likely stabilise around 16.5 – 17 per cent in short term.”

“Monetary policy appears set to remain relatively unchanged in the months ahead.  Assuming no significant change to key indicators, we think the MPR will be held at 14 per cent in subsequent MPC meetings.

“Overall, the short end of the curve will remain attractive as concerns over the outlook for naira and inflation continue to be influenced by CBN’s monetary policy in the short term,” they added.

On their part, analysts at Renaissance Capital held the view that with its decision, the MPC wants to allow the existing policies to achieve their intended goals (slow inflation).

“However, we think the year-to-date pick-up in month-on-month inflation implies strong non-food (mainly energy costs) inflationary pressures persist.

“We also think fiscal spending and CBN financing of the budget deficit are upside risks to inflation. For these reasons, we revise upwards our year-ending 2017 inflation forecast to 14 per cent versus 11 per cent previously,” Renaissance Capital stated.

But the Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane described the MPC decision as a case of “when in doubt, do nothing.”

According to Rewane, the MPC members, in their wisdom felt it was too early to make any dramatic change in its monetary policy direction.

“What I would say is that they did not disappoint anybody. But at the same time, they did not excite anybody,” he added.

Reacting to the performance of the economy in the first quarter as reflected by the GDP figures released yesterday, he said: “GDP figures are moving in the right direction. But it only confirms our view that it is going to be a slow and painful recovery and that there is no quick fix.

“The only way to enhance this recovery is to actually make credit available to the real sector to stimulate economic activities. That would not be possible with the current interest rate regime. So, the MPC needs to take some aggressive steps to support the recovery. The bold thing to do would have been to move, but the wise thing to do was to wait a little bit to see what happens next,” he added.

To the Director General, Lagos Chamber of Commerce and Industry (LCCI), Mr. Muda Yusuf, the MPC outcome was expected, saying that a lot of analysts had predicted that interest rate would be retained, knowing the mind-set of the central bank as regards inflation and exchange rate.

“So, what the MPC did was not a surprise to us. But from our perspective, we would like to see a better interest rate regime. We feel the current interest rate is too high for businesses. But the position of the CBN is that relaxing its tight monetary policy would pose a risk to inflation.

“But our view is that under the prevailing interest rate regime, businesses would find it very difficult to succeed. But the good thing is that we have seen some improvement in foreign exchange policy regime, which is a consolation for us. So, gradually, we hope they would get to a point where they begin to relax the monetary policy condition,” the LCCI boss explained.

Also, research Analyst for FXTM, Lukman Otunuga said the central bank took the logical decision to maintain key interest rates as the nation stabilises and continues its on-going quest to diversify beyond relying on oil exports.

“With Nigeria’s GDP for the first quarter of 2017 still in recessionary territory, the damage of depreciating oil prices still lingers on with social economic issues, soft domestic data and inflation exposing the nation to downside risks,” he added.

Limits of Monetary Policy

The Director General of the West African Institute for Financial and Economic Management, Prof. Akpan Ekpo said that monetary policy has reached its limit, and argued that what the MPC members did was the best they could do.

 “When the economy starts recovering, then monetary policy would start having an impact. For now, what they are doing is the right thing. They should keep interest rate the way it is.

“But when the economy starts recovering, they can slightly reduce the MPR. My worry is that it is taking long for us to get out of recession. The first quarter GDP still shows negative growth and if the second quarter figures don’t show positive growth, then there is a problem. It means that we are not seeing the impact of the federal government’s policies,” he added.

The foregoing therefore shows the need for increased collaboration between the fiscal and monetary policy authorities in order to do everything possible to steer the economy onto the road of positive economic growth and unleash the country’s untapped potential.