As MPC Remains in ‘Wait and See’ Mode



By Obinna Chima

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) at the end of its first meeting for the year held last week decided to keep all its monetary policy tools unchanged as it awaits more evidence of the impact of its restrictive policy that has been in place for 21 months.

Specifically, the newly formed MPC board resolved at the end of the meeting to retain the Monetary Policy Rate (MPR) at 14 per cent, the Cash Reserve Ratio (CRR) at 22.5 per cent, Liquidity Ratio (LR) at 30.0 per cent, and the asymmetric corridor at +200 and -500 basis points around the MPR as it continues in a ‘wait and see’ mode.

The record-high benchmark rate has been held at 14 per cent since July 2016 and some analysts had anticipated that the MPC would signal its preparedness to commence monetary easing by slightly lowering the rate.

Briefing journalists at the end of the meeting, CBN Governor, Mr. Godwin Emefiele, said in reaching its decision to retain the rates, the committee appraised the potential policy options in terms of the balance of risks.

“The committee also took note of the gains made so far as a result of its earlier decisions, including the stability of the foreign exchange market, the moderation in inflation rate as well as the restoration of economic growth.

“The committee was, however, concerned about the fiscal distortions associated with absence of buoyancy between GDP growth and tax revenue, and urged the fiscal authorities to deploy appropriate corrective measures to address this phenomenon.

“The committee was of the view that further tightening would strengthen the impact of monetary policy on inflation with complementary positive effects on capital flows and exchange rate stability. Nevertheless, it could potentially dampen the positive outlook for growth and financial stability,” Emefiele said.

According to Emefiele, the committee was of the view that loosening would strengthen the outlook for growth by stimulating domestic aggregate demand through reduced cost of borrowing. This may, however, lead to a rise in consumer prices, generating exchange rate pressures on the currency in the process.

“The committee also believes that loosening could worsen the current account balance through increased importation. On the argument to hold, the committee believes that key macroeconomic variables have continued to evolve in a positive direction in line with the current stance of macroeconomic policy and should be allowed more time to fully manifest.

“In consideration of the foregoing, the committee decided unanimously by a vote of all members present to retain the Monetary Policy Rate (MPR) at 14.0 per cent alongside all other policy parameters,” he said.

After its last meeting in November 2017, the MPC could not form a quorum to sit in January 2018 due to the refusal by the Senate to confirm new nominees of President Muhammadu Buhari after some members of the committee had completed their tenures and retired.

Emefiele disclosed that the committee noted the continuous positive outlook of the economy based on the manufacturing and non-manufacturing purchasing managers’ index (PMI) which stood at 56.7 and 57.2 index points respectively in March, indicating expansions for the 12th and 11th consecutive months.

But the decision by the MPC was not welcomed by the Chairman of the Ogun State chapter Manufacturers Association of Nigeria (MAN), Mr. Wale Adegbite.

Adegbite expressed disappointment over the decision to retain all interestrate, saying that the MPC could have reduced the policy rates so as to jump-start the economy after the long seizure for close to two years.

“We hope that the rate would have started coming down now because we need a lower interest rate so as to increase activities in the manufacturing sector, “the chairman said.

Adegbite said with lower interest rate, the manufacturer would be able to produce at the optimal level as well as adding value to the nation’s Gross Domestic Product (GDP).

Also, the chief executive, Financial Derivatives Company Limited, Mr. Bismarck Rewane, who also frowned on the MPC decision, said: “What is concerning to me is that the central bank is going to be playing an interventionist role by lending to certain vulnerable sectors whereas if they dropped the rate the entire economy would benefit.”

Nonetheless, the Nigeria Economic Summit Group (NESG), arguedreducing interest rate could stimulate growth but trigger inflation and exchange rate pressure.

However, it pointed out that the MPC’s decision to hold interest rate was predicated on achieving more clarity in the evolution of key macroeconomic indicators such as exchange rate, inflation, GDP growth rate, global oil price among others.

“Hence, we believe that MPC’s decision to retain interest rate will continue to strengthening current account balance,” they added.

Also, a senior economist at London-based Exotix Capital Christopher Dielmann said he was not surprised by the action, adding that a rate cut was unlikely to occur until the rate of inflation has declined close to 12 per cent.

“However, we suspect political considerations will play a major role in MPC decision-making, with the incumbent regime keen to lower the cost of borrowing and spur growth as we move nearer to the February 2019 general election.
“This view is strengthened by the high level of reserves and inflation falling faster than growth is rising,” he added.

Dielmann observed that the MPC’s decision to leave rates unchanged was clearly driven by the high and persistent inflation, which has plagued the country since 2016.

“It is clear that in the eyes of the MPC, inflation concerns outweigh the worries about the stagnant recovery of growth since the 2016-2017 recession.

“As we have written in the past, we do not envy the position that the Nigerian MPC is currently in, in that it is being tasked with fighting stagflation – high unemployment (perhaps as high as 20%), as a result of stagnant growth, and high inflation.

“Ultimately, these challenges will not be fixed through the MPC’s decisions alone and will require vast structural changes across the economy. Given the reality of this situation, it is not surprising that the MPC elected to hold rates constant to allow the directional trends in both growth and inflation to continue to move towards desired levels,” he said.

The Chief Economist for Africa at Standard Chartered Bank Razia Khan said it may be that the MPC decided to wait to confirm the deceleration in headline inflation before it cuts its policy rate.

According to her, the MPC remains concerned about the relative stickiness of food price inflation in Nigeria, notwithstanding weak demand, weak economic performance, and weak credit growth.
Khan, however, anticipated further MPR easing over the course of the year, noting that maintaining forex stability was paramount for now.

 “Notwithstanding the improvement in oil earnings, downside risks to the outlook for the Nigerian economy still predominate. The CBN will try to counteract this through its targeted provision of subsidised credit to certain sectors, at below-inflation interest rates, in line with what it calls its ‘development objective’.

“We believe, however, that the longer-term strengthening of Nigeria’s monetary and banking framework would be better served by greater reliance on the MPR itself as a signal of monetary policy intent,” she said

On its part, Afrinvest Securities Limited pointed out that a policy rate cut in 2018 would among other things, be dependent on a supportive external account condition – stable oil prices, rising current account surplus and external reserves – which empirical studies have emphasized to be the major anchor of monetary policy.

“The key downside risks to external account stability are ‘sudden stops’and high probability of capital flow reversals as the 2019 election season draws near; yet, we think the CBN has enough external reserves and resolve to defend the currency.

“Benign outlook for consumer prices, which the CBN Governor has repeatedly highlighted to be a major policy consideration. With persistent deceleration of Inflation rate, the case for easing will become more compelling in the second half of 2018. Afrinvest Research forecasts year-end inflation at 11.4 per cent.

“Although we expect a rate cut in 2018, the impact on fixed income yields might not be substantial as the CBN has already set in motion the easing cycle by deliberately guiding market rates down in the past 6 months, in addition to knock-on effect of the FGN fiscal strategy to reduce domestic debt issuance,” the firm added.