The Central Bank of Nigeria (CBN) kept key rates flat yesterday in what analysts said could be a deliberate move not to offset attained monetary policy stability ahead of resumption of the new apex bank governor, Godwin Emefiele, next month.
For the 16th straight time, the CBN held the Monetary Policy Rate (MPR) steady at 12 percent +/- 200 basis points, as it also retained the Cash Reserve Ratio (CRR) on public deposits at 75 percent and that for private sector deposits at 15 percent.
Analysts said with increasing liquidity in the system occasioned by maturing instruments of the Asset Management Corporation of Nigeria (AMCON), allocations of the Federal Accounts Allocations Commission (FAAC), and anticipated election spend, there remained limited options for the incoming governor to effect necessary changes.
Announcing the outcomes of the MPC meeting, Sarah Alade, acting CBN governor, said the decision to retain rates was based on the acknowledged success of the monetary measures in attaining price and exchange rate stability, adding that potential headwinds in 2014, the ultimate goal of transiting to a truly low inflation environment and the need to retain portfolio flows were all considered.
But the CBN, she said, was particularly concerned that the eroded fiscal buffers had exposed the economy to vulnerabilities arising from both domestic and external shocks, pledging that the apex bank would continue to monitor developments in the fiscal space with a view to taking appropriate monetary policy actions.
“The erosion has accentuated the regime of persistently high interest rates, elevated demand for foreign exchange and declining reserves accretion,” she stated.
In his reaction, Bismarck Rewane, chief executive officer, Financial Derivatives Company, said that considering the political environment, the decisions were not unexpected.
Rewane said that Emefiele’s earlier statement expressing determination to continue to defend the naira would only be predicated on what he meets on ground on assumption of office and after proper briefing, noting that with the correlation between naira volatility and election period, the governor would definitely effect some adjustments on the local currency even sooner than expected.
Razia Khan, regional head of research, Standard Chartered Bank, said there was little reason for the MPC to alter any policy just yet.
“However, a note of caution was signalled on a number of fronts – market conditions are very liquid, calling into question the sustainability of current outcomes. Core inflation is seen to be rising, and the CBN MPC remains rightly concerned about the erosion of fiscal buffers,” she said, adding, “For now, global conditions are relatively benign – and this has provided some space to the MPC not to act in the very near-term.”
Kobi Momoh, chief risk officer, Keynote Bank, expressed similar sentiment, saying that Emefiele might not be comfortable with the present foreign reserves level, officially at $38.30 billion, which can only cover nine months of imports.
Nigeria’s external reserves had dropped from $42.85 billion in December to its present level, even when oil prices had remained substantially high.
Sola Adegbesan, head of global markets, Stanbic IBTC, while acknowledging the efforts of the outgoing governor in maintaining stability, said with the current monetary stance and unfolding events at the CBN, investors were now in some sort of “wait and see” mood.
The CBN has also observed mixed signals over the global growth prospects in the advanced, emerging markets and developing economies.
For the emerging markets and developing countries, the apex bank is concerned that the current underlying pressures on their currencies arising from capital flow reversals, increases in consumer prices and declining inflows, which preclude the use of expansionary monetary policy to stabilise domestic output and employment in the short run, could dampen growth prospects.
Nigeria’s overall domestic economic environment has remained stable with inflation contained within the target range, stability seen in the foreign exchange market, interbank rates as well as strong growth outlook.
But the key challenge for policy, in the CBN’s view, was that of sustaining and deepening the outcomes of existing policies, expressing fears that major risks to price stability appeared to be emanating from both external and internal sources over the medium term.
John Omachonu & Onyinye Nwachukwu
