By BUKOLA IDOWU, Lagos
The Monetary Policy Committee of the Central Bank of Nigeria rose from its 113 meeting in Abuja last week, maintaining the stance of the committee from the previous meeting, despite the several calls from the private sector to cut rates.
The committee by an unanimous vote of the eight members present decided to retain the Monetary Policy Rate (MPR) at 14 per cent; the Cash Reserve Requirement (CRR) at 22.5 per cent; the Liquidity Ratio at 30.00 per cent; and the Asymmetric corridor at +200 and -500 basis points around the MPR.
Rising from its two day meeting, the MPC said it had contemplated further tightening monetary policy but considered that a tightening would widen the income gap, depress aggregate consumption and adversely affect credit to the real sector of the economy.
Its consideration of a tightening stance was based on the associated risks to banking system liquidity of the envisaged fiscal injections as the government signs the budget and begins the implementation of the Economic Recovery Growth Plan (ERGP) which is expected to see an increased spending on the part of government.
The hawkish stance consideration is despite calls from some quarters for a cut in benchmark interest rate, a move analysts say would have reversed the gains the country has recorded in the foreign exchange market. Analysts at FSDH Merchant Bank noted that a change in the monetary policy stance that results in lower rates may be counterproductive to address the current high inflation rate, while expansionary monetary policy stance at this time may not also support a stable foreign exchange rate.
The MPC had been concerned that loosening would exacerbate inflationary pressures and worsen the gains so far achieved in the exchange rate of the naira. It was also convinced that loosening would further increase the negative real interest rate as the gap between the nominal interest rate and inflation widens.
The MPC in the communique issued at the end of the meeting welcomed the passage of the 2017 Budget and called on the relevant authorities to ensure its judicious implementation, especially, the capital budget in line with the Economic Recovery and Growth Plan. It, however, noted the associated risks to banking system liquidity of the envisaged fiscal injections during the remainder of the year.
It noted that it was particularly pleased with the gradual retreat in, the relative stability in the naira exchange rate across all segments of the foreign exchange market and the improved prospects of foreign investment inflow.
Governor of the Central Bank of Nigeria, Godwin Emefiele had informed of the apex bank desire to end the spread between the black market and official foreign exchange rates, adding that the recent rise of the naira versus the dollar showed that the central bank’s policies were working.
“We would prefer a convergence that will go southward rather than northward, but the fact that we have seen the convergence (going) southward gives us a lot of hope that things are working in the right direction,” he added, refusing to give an exchange rate target.
The value of the naira had stabilized at the parallel market at N380to the dollar, a range which it has been trading for week while the Investors and Exporters window which operates at a market determined rate has also hovered between N379 and N381 to the dollar in recent times.
The consistent intervention of the CBN at both the interbank and bureau de change ends of the foreign exchange market has kept the rates not only stable but also reduced the gap between the rates in the market. There has been accolades to the apex bank, particularly on the I and E window as the inflow of foreign currency from investors from outside the country increases.
This was evident in the figures released by the National Bureau of statistics which showed that Portfolio Investment, which accounted for $313.61 million, or 34.53 per cent of the total capital imported in the first quarter of the year was the second largest component.
Foreign Portfolio Investments in the first three months of the year had grown by10.34n per cent relative to the previous quarter, and 15.71 per cent relative to the same quarter of 2016. It was the only category to record both year on year and quarterly increases, and it was the first year on year increase since the third quarter of 2014. According to the NBS, this was possibly related to recent successes in stabilizing the naira, as the currency during the first quarter halted its continual decline.
Commenting on the decision of the MPC, an analyst at FXTM, Lukman Otunuga said CBN has made the logical decision to maintain key interest rates at 14 per cent as the nation stabilizes and continues its ongoing quest to diversify beyond relying on oil exports.
“With Nigeria’s GDP for the first quarter of 2017 still in recessionary territory, the damage of depreciating oil prices still lingers on with social economic issues, soft domestic data and inflation exposing the nation to downside risks.
Although inflation has displayed subtle signs of stability this year, and April’s Purchasing Managers Index has highlighted a rebound in the business activity, there will be an increasing focus on GDP growth. Parliament has already approved a 21 per cent budget hike to boost the economy while the central bank is tackling foreign exchange woes which should support the nation in the longer term.
“I believe that the hardship and pressure Nigeria continues to face may aid its evolution, with an end result that may shock the global arena.”
Holding Rates To Sustain Gains
By BUKOLA IDOWU, Lagos