Anticipated inflation concerns forced the Central Bank of Nigeria (CBN) to retain the Monetary Policy Rate (MPR) at 14 percent and kept all other benchmark lending rates steady for the 10th straight time on Tuesday.
CBN governor, Godwin Emefiele, briefing on the outcomes of the two days Monetary Policy committee (MPC) meeting, said it was a wait and see approach to allow clarity on how far the huge anticipated spending from a combination of the over N9 trillion 2018 budget, expanded monthly disbursements by the Federation Accounts Allocation Committee (FAAC), election spending, among others could have on price stability.
“The predominant argument for a hold at this time is to await more clarity on the evolution of key indicators that is the passage of the budget and implementation, economic activity and traction in fiscal policy in 2018,” Emefiele said after the meeting.
Nigeria has seen inflation in a downward trend for 15 consecutive months – from a high of 18.72% in January 2017 to a two -year low of 12.48% in April 2018.
Emefiele acknowledged that the outlook for inflation indicate a continued moderation in the price level, but fears that risks include the huge liquidity injections expected to arise from the implantation of the proposed N9.12 trillion 2018 federal government budget, expenditure towards the 2019 elections, monthly FAAC injections, approval and implementation of the proposed new national minimum wage and the possibility of a supplementary budget to finance it.
“These could impact aggregate demand and put pressure on domestic prices in the remaining months of 2018 and may dampen the gains already made by the CBN in stabilizing prices.”
In taking the decision endorsed by eight of its members, the CBN’s Monetary Policy committee critically evaluated developments in the domestic and international environments, Emefiele said, noting in particular progress in stimulating output growth, including stability in the foreign exchange market and increased level of foreign exchange
reserves and sustained deceleration in the rate of inflation.
One member, however voted to raise the MPR by 50 basis points.
The committee considered the forecast of high liquidity injection in the second half of 2018, and upward pressure on prices driven largely by substantial expansionary fiscal policy which would arise from the late passage of the 2018 appropriation bill, outstanding balance from the 2017 budget and the pre- election expenditures.
The committee considered that tightening would facilitate the mop up of excess liquidity, but were discouraged because the current inflation rate is still above targeted single digit and real interest rate only turn positive in the review period.
Moreover, raising interest rate would depress consumption and increase the cost of borrowing to the real sector. They also fear that such policy could make Deposit Money Banks re-price their assets.
In the choice of loosening, the committee members also evaluated the overall impact of stimulating aggregate demand through lower cost of credit, but feared that the liquidity injection forecast could rise tangentially in the second half of the year.
They equally considered that the outcomes of loosening would mostly exacerbate inflationary pressures, cause higher pressures on the exchange rate and elevate demand for foreign exchange, while bringing a return real rate into negative territory as nominal interest rate get less than inflation.
“Besides, reducing MPR may not really translate into lower lending rates on the account of the present high cost of doing business.
“Loosening could further worsen the current account balance through increase in importation, margin lending, lowering of risk evaluation in accessing loans which will drive up loans and increase Non-Performing Loans with potential consequences on the stability of the banking sector,” they argued.
In a consideration to hold, the committee agreed that the downside risk to growth and upside risk to inflation appear balanced, as growth is improving while inflation is seen moderating.
“Maintaining the current policy stance would sustain gradual improvement in both indices,” Emefiele stated.
“It was noted that there was need to see how all the components of the Gross Domestic Product will evolve in the second quarter of 2018 inorder to gain greater clarity on the direction of monetary policy,” the governor added.
Meanwhile, CBN Staff forecast given the anticipated liquidity injection into the economy suggest an upward trend pressure on domestic prices from the second half of fiscal year of 2018.
Consequently the CBN has called for an orderly injection of anticipated liquidity by the fiscal authorities to prevent a negative shock to prices that would derail the positive, but fragile recovery so far achieved.
Emefiele said there are significantly high levels of uncertainties that could arise from the fiscal operations of the government in the near term.
The governor was, however of the view that the maroeconomic environment which propelled the country’s exit from recession has remained positive and likely to continue in the near term, on the back of the speedy implementation of the 2018 budget, improved security, continued stability in the foreign exchange market as well as increase in crude oil production and prices.
However, the downside risks to the outlook include the late approval and implementation of the 2018 budget, farmers’ herdsmen conflict, low demand and consumer spending associated with outstanding salaries as well as contractor debt and the growing level of sovereign debt.
Though foreign reserves have risen to about $48 billion helped by rising oil prices, the CBN has also urged the government to leverage on it and build fiscal buffers against future oil shocks.
