Heightening concerns about liquidity levels in the system and the trending uptick in inflation which may be connected with the poor harvest in some agricultural areas, especially in the northeastern and north-central states of the country, among others, informed the retention of the monetary policy rate (MPR) by the Central Bank of Nigeria (CBN) yesterday.
Godwin Emefiele, CBN governor, who presided over his first Monetary Policy Committee (MPC) meeting after assumption of office in June, said retaining liquidity ratio at 30 percent and public and private sector Cash Reserve Requirement (CRR) at 75.0 percent and 15 percent, respectively, was occasioned by concerns that inflationary pressure, which was marginally subdued since last year, had re-emerged since February.
All measures of inflation have witnessed progressive upward trend since February 2014, a situation the CBN said it would monitor closely to reverse.
Year-on-year headline inflation steadily inched up marginally from 7.9 percent in April to 8.0 percent in May 2014, and further to 8.2 percent in June on upward food inflation which rose from 9.7 percent in May to 9.8 percent in June, while core inflation, on the other hand, rose from 7.7 percent in May to 8.1 percent in June.
“Other pressure points include the underlying pressure from food/core inflation and the risks that could emanate from the likely increase in aggregate spending in the run-up to the 2015 general elections,” Emefiele stated in his briefing on the outcome of the two-day MPC meeting in Abuja.
While the inflationary pressure remained a concern, the governor was hopeful that other reform measures could dampen food prices in the short to medium term and restore inflation to a sustainable long-run path.
Bismarck Rewane, chief executive officer, Financial Derivatives Company (FDC), in the Economic Bulletin released last week, said, “In July, we are of the opinion that there would be a further increase in the headline inflation rate in spite of the commencement of the harvest season. The projected increase in July will be partly due to factors that include: steady growth in money supply – annualised money supply growth was 5.81 percent in May – slow but steady impact of the new automotive policy on transportation cost, disbursement of capital votes under the 2014 budget, higher cost of power and increased security spending.”
Razia Khan, analyst at Standard Bank, London, said, “The decision from the CBN’s MPC was largely as expected – with all rates kept on hold. While mention was made of the upward pressure on inflation, with the CBN stating that it would be carefully monitoring liquidity levels, the MPC nonetheless restated the governor’s goal of lower interest rates in the long term.”
Khan further said for the markets, this raises key questions around how the CBN might react when liquidity pressures are even more pronounced than they are now.
“An additional AMCON maturity of just less than NGN 1trn is expected in October. The political primary season and pre-election spending are likely to build in intensity from September on,” she said.
Meanwhile, Gross Official reserves rose to $40.20 billion as at July 2014, from $37.31 billion June level. Emefiele said the increase was mainly due to increased accretion and moderation in the rate of depletion, noting, however, that this needed to improve much faster to provide a strong and more resilient buffer to fiscal operations.
He said a gradual reduction in the country’s import bills through domestic production of some of the major food imports should be a key element in the overall reserves accretion strategy, announcing banks’ decision to collaborate with other stakeholders in this regard.
But another key concern of the apex bank is the implication of the on-going QE3 tapering for inflows and external reserves.
Emefiele commended the relative stability in the macro economy as reflected in the impressive growth rates, stable consumer prices and exchange rate, as well as increased external reserves.
But he noted the CBN’s concern over the weak translation of stability to microeconomic gains in employment and access to finance, especially by small and medium scale businesses.
ONYINYE NWACHUKWU
