Despite Receding Inflation, Election Spending May Compel MPC to Hold Interest Rate

By Obinna Chima    

Despite the drop in inflation to 12.48 per cent in March to below the Central Bank of Nigeria’s benchmark Monetary Policy Rate (MPR) of 14 per cent, members of the Monetary Policy Committee (MPC), slated to commence their two-day meeting in Abuja today, may be reluctant to ease monetary policies due to concerns over the likely impact of 2019 election spending on the economy.

The committee members would also take into consideration the move by the federal government to raise the minimum wage of civil servants in the country and the attendant effects on inflation.

The MPC has consistently held that inflation was above MPR as one of the reasons for its restrictive monetary policy stance.

But with political parties expected to kick off their campaigns in earnest by the second half of this year, spending by politicians is certain to have an impact on the economy.

MPC members, said analysts, would also factor the impact of increased money supply on the foreign exchange market.

This, they said, was expected to weigh on the minds of MPC members as they meet today and tomorrow, saying it was unlikely that the CBN would change its tight monetary stance until inflation begins to move into single-digit territory.

At its last meeting in April, the MPC had maintained the MPR at 14 per cent with the asymmetric corridor at +200 and -500 basis points around the MPR and retained the Cash Reserve Requirement (CRR) and Liquidity Ratio (LR) at 22.5 per cent and 30 per cent respectively.

Another factor likely to come up for discussion at the MPC meeting includes the Purchasing Managers’ Index (PMI), which last month showed an expansion, just as increased capital inflows and favourable developments in the crude oil market continued to have a positive impact on the economy.

Oil prices hit $80 per barrel last week – their highest since June 2014 – against the backdrop of America’s exit from the Iran nuclear deal, falling oil inventories, and the impact of OPEC’s production cut deal.

Notwithstanding the positives of higher oil prices on Nigeria’s foreign reserves and current account balance, they also come with the attendant risk of ballooning petrol subsidies.

As the MPC commences its meeting, the NBS is also due to release first quarter GDP numbers, which analysts forecast would show continued expansion.

Regardless of the positive momentum, analysts at Cowry Asset Management Limited, anticipate “a retention of the policy rates”, saying that moderation of the MPR would not commence as inflation rate remains above the single-digit target of the CBN.

“This is also informed by the probable increase in both fiscal and political spending activities, among other things.”

Financial Derivatives Company Limited, in a note at the weekend, said major considerations at the meeting would include the sustained decline in inflation as well as the anticipated positive, but weak GDP growth data.

“More importantly is the anticipated inflation trajectory especially when budget funds are disbursed and the minimum wage review kicks in.

“These factors will increase the level of money supply in the system and exacerbate inflationary and forex demand pressures.

“Also, the confluence of the Ramadan fast and planting season would lead to an accentuation in inflationary pressures.

“This will have an upside effect on food prices. Nonetheless, the recent interventions of the government in the agricultural sector should increase output and dampen the adverse effect,” FDC stated.

FSDH Merchant Bank Limited, however, was of the view that the recent developments in the economy and the short-term outlook of the economy favours monetary policy easing, stressing that it would be necessary to stimulate economic growth and credit creation.

“We believe this easing may come in the form of an adjustment to the MPR or an adjustment to the CRR.

“FSDH Research considers the Nigerian economy has recorded a reasonable level of price stability that should encourage the MPC to now concentrate on growth in the economy.

“We also note that certain lending rates in the economy are predicated on the MPR. Therefore, to boost credit creation and stimulate economic growth, monetary policy easing would be appropriate,” FSDH added.

In contrast, Afrinvest Securities Limited expects the committee to maintain status quo on all policy rates.

“We expect the emphasis to be placed on the need to withstand a possible pass-through inflation from rising global inflation as well as protecting the economy and financial markets against rising downside risk of capital flow reversals.

“We believe the odds of the MPC slashing the MPR in the same period it is aggressively sterilizing liquidity is slim; hence we expect the CBN to maintain the status quo on all rates.

“Regardless, as we have argued in previous notes, an MPR cut (either at next week’s sitting or subsequent ones) will have little impact on fixed income yields as the CBN has already set in motion the easing cycle by deliberately guiding market rates downwards in the last three quarters, in addition to the knock-on effects of the FGN fiscal strategy to reduce domestic debt issuance,” Afrinvest noted.