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Concerns raised by the Central Bank of Nigeria (CBN) on the potential impact of the 2019 election spending and the need to further rein-in current inflation pressures could signal the apex bank may not cut rate anytime soon, contrary to some analysts.
Financial analysts, including Bismarck Rewane, Chief Executive Officer, Financial Derivatives Limited had expected the CBN could begin easing its monetary stance in order to strengthen growth in the fragile economy.
But for the ninth straight time on Wednesday, the CBN retained its key benchmark rates, indicating confidence that the tightening stance has seen key macroeconomic variables evolve positively and should be allowed more time to fully manifest.
Meeting for the first time in the year following Senate confirmation of its members, the Monetary Policy Committee (MPC) voted unanimously to retain the Monetary Policy Rate (MPR) at 14.0 per cent. The committee also left the Cash Reserve Ratio (CRR) at 22.5 per cent; Liquidity Ratio at 30.0 per cent; as well as the Asymmetric corridor at +200 and -500 basis points around the MPR.
Announcing the outcomes of the two days meeting, CBN Governor, Godwin Emefiele said key macroeconomic indicators give a positive outlook for the Nigerian economy in 2018, though predicated on the quick passage and effective implementation of the 2018 budget, improved security, foreign exchange market stability as well as favourable crude oil prices.
But on downside, the “Committee noted the potential impact of the 2019 election related spending, against the weak backdrop of tax revenue efforts, herdsmen related violence and rising yields in the advanced economies. Indications in the US and the UK point to higher interest rates in the short to medium term,” the governor stated.
He said in reaching the decision, the Committee considered 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 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.
However, the Committee is 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.
Inflationary pressures in the economy continued to moderate. According to figures from the National Bureau of Statistics (NBS), headline inflation (year-on-year) receded for the thirteenth consecutive month to 14.33 percent in February 2018 as against 18.72 per cent in January 2017.
Month on- month food inflation fell by 133 basis points to 17.59 percent in February 2018, and core inflation also declined marginally by 38 basis points to 11.71 percent during the same period.
“The committee also noted the continued moderation in all measures of inflation as well as sustained stability in the naira exchange rate and urged the Bank to sustain the stability to avoid a mission drift,” Emefiele said.
He said the committee particularly welcomed the narrowing of the exchange rate premium between the BDC segment and the Investors’ and Exporters’ (I&E) window of the foreign exchange market.
Emefiele raised concerns on the rather slow pace of moderation in food inflation despite the general improvement in macroeconomic conditions, as well as the potential risk of a pass-through from rising global inflation to domestic prices.
He said the MPC members, however, expressed confidence that the tight stance of monetary policy would continue to complement other policies of government in addressing some of the structural issues underlying the stickiness of food prices.
“The Committee noted that at 14 per cent, the policy rate was tight enough to rein-in current inflationary pressures. The Committee, therefore, reaffirmed its commitment to price stability conducive to sustainable and inclusive growth,” the governor also stated.
Onyinye Nwachukwu, Abuja
