The Central Bank of Nigeria (CBN) kept its monetary policy rate (MPR) at 14 percent for the 9th consecutive period, amid slowing inflation.
The CBN on Tuesday after the two day Monetary Policy Committee (MPC) meeting in Abuja applied a wait and see approach on liquidity risks expected to emanate from rising FAAC allocations, the threat of higher 2018 budget spending, the risk of a supplementary budget allowing for a rise in the minimum wage, and other elements of pre-election spending.
Also, the Apex bank kept unchanged the liquidity ratio at 30 percent, Cash Reserve Ratio at 22.5 percent and +200/-500 basis point asymmetric corridor around the MPR, hinting that it would not consider easing until inflation fell to single digits.
“The objective of the policy stance will be to accelerate the reduction in the rate of inflation to single digits, promote economic stability, boost investor confidence and promote foreign capital flows,” Godwin Emefiele, governor of CBN said.
The MPC’s decision has prompted some economists to question whether rate cuts will ever materialise in the wake of slowing inflation rates.
“We interpret the decision to keep all rates unchanged as suggesting that FX stability – even with oil back at USD 80/bbl – remains paramount, and the CBN will not do anything to risk this. Not even easing, when the opportunity presents itself,” Razia Khan, Africa Chief Economist at Standard Chartered Bank, London, said in emailed response to BusinessDay.
Khan added, “inflation is on a downtrend courtesy of recent FX stability. It will likely decelerate further. The economy is weak. Outside of lending to the government, money supply is contracting. In our view, it would have made more sense for the CBN to front-load its easing, reversing course later on if it became clear that pre-election spending – in its multiple forms – was likely to be a problem.”
The CBN governor noted that members were faced with the choices of maintaining status quo, tightening, or easing monetary policy.
“it is surprising to me because what the CBN is saying is that we should let the economy lift itself first before we take steps to stimulate it into a path of sustainable development and expansionary growth,” Bismarck Rewane Managing Director and CEO at Lagos-Based Financial Derivative company said.
“Look at Ghana that has brought down rate five times in the last 12 months, we have seen growth at 8.5 percent alongside inflation dropping from 22- 17 percent. So I do not understand what the logic is on why one has to wait for inflation to get to single digit in anticipation of a supplementary budget.”
“This is an output issue and not because of excess demand, it is because output is not enough so we need to do things that will increase credit and stimulate activities which will invariable lead to a decline in inflation,” Rewane added.
On the domestic front, the Committee noted the continued drop in headline inflation rate in April at 12.5 percent , rebounding crude oil prices and stable production, FX stability amid strong external reserves, and sustained GDP growth.
In particular, the Committee highlighted the impact of monetary policy normalisation in the U.S. – with a number of currencies in emerging markets experiencing pressure already.
Responding to the MPC decision, Ayo Teriba, Chief Executive Officer, Economic Associates, said “Amid strong arguments for the three positions, the choice of seeking further clarity on the evolution of major macroeconomic fundamentals culminated into a decision (8 votes to 1) of holding policy rates constant, while allowing for policy flexibility as developments unfold in the macroeconomic space”
“To me I feel it makes a lot of sense for us to wait and see the trend the rate of inflation will before we will be thinking about easing the MPR. Thus holding the repo rate at 14 percent to me is the best bet the committee has taken,” Teriba added.
The MPC stated that it was dissatisfied by the current pace of lending by deposit money banks. Credit to the private sector is negative, narrow money also contracted.
Emefiele, said the CBN would come up with a framework that would compensate banks that are lending to the real sector of the economy and sanction those that prefer to invest rather than lend.
“We will try as much as possible to come up with some credentials that will relate loan deposit ratio with the level of cash reserve that the bank holds so as to redirect the banks or compensate the bank that has done a lot of work in putting its loan deposit ratio through compensating them with CRR and penalise those who prefer to keep liquidity and trade on government securities or direct those to the FX market rather than grant loans to the real sector. That framework will certainly come up and we will work on it. We are optimistic that the monetary policy committee will take that decision in the medium term,” Emefiele said while responding to questions.
On currency swap deal, the CBN plans to release the framework for this by next week and the settlement banks have been chosen which are Standard Charted Bank and Stanbic IBTC Bank that has its own affiliate the ICBC as the correspondent bank in China.
“I expect that this deal is positive for Nigeria and can never be negative to the country”, Emefiele said.
HOPE MOSES-ASHIKE, BUNMI BAILEY, MICHEAL ANI, ENDURANCE OKAFOR
