Monetary Policy Rate Easing Not Yet In Sight — Leadership Newspaper
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Monetary Policy Rate Easing Not Yet In Sight

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For the 11th consecutive time, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has left the benchmark lending rates unchanged at 14 per cent despite a decline in inflation rate to 12.5 per cent. BUKOLA IDOWU looks at the likelihood of a rate cut soon.

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) last Tuesday rose from its two- day meeting held in Abuja, leaving the benchmark lending rates as it has been for almost two years, a position many analysts believe will remain for the rest of the year.

Despite calls for a reduction in rates to lower borrowing costs for businesses in the country, the committee for the 11th consecutive time, retained the Monetary Policy Rate (MPR) at 14 per cent, Cash Reserve Ratio (CRR) at 22.5 per cent, Liquidity Ratio (LR) at 30 per cent, and the asymmetric corridor at +200-500 basis points around the MPR.

 

Pre-election Spending and Inflation Targeting

The committee expressing apprehension that the late passage and implementation of the 2018 budget, as well as election spending, could trigger inflationary trends and reverse the economic gains made so far, if pre-emptive measures are not adopted, explained that it retained the rates in consideration of the forecast of the high liquidity injection.

Unlike the first meeting of the year held last month, where all members had voted to retain rates, one member had voted to further tighten as a preemptive step against an impending rise in inflation, while eight members called for retention.

Personal notes of the MPC members after the April meeting show that they are concerned that a rate cut would weaken the current account through its boosts to imports and would unsettle foreign investors and therefore create pressure on the exchange rate. The value of the naira has been stable around N360 to the dollar at the Investors and Exporters (I&E) window on liquidity inflow and rising oil prices.

According to the governor of the CBN, Godwin Emefiele, the committee felt that further tightening would ensure the mop up of excess liquidity, mindful that despite the moderation in inflation, the current inflation rate was still above the single digit target and that the real interest rate only turned positive in the review period.

Although inflation rate has been on a consistent decline, as the National Bureau of Statistics (NBS) figures show that it had dropped to 12.5 percent in April of 2018 from 13.3 percent in the prior month and in line with market expectations. It was the lowest inflation rate since February of 2016, as prices of food and non-alcoholic beverages and housing and utilities grew at a slower pace.

 

A Balancing Act

The federal government plans to further increase spending this year with an N8.6 trillion budget which was increased to N9.1 billion by the legislative arm of government before it was passed. Almost six months into the year, the budget is yet to be passed having recently being accented to by the lawmakers, it is awaiting presidential consent.

Analysts say while the negative impact of the increased spending of six per cent of N9.1 trillion has been grossly exaggerated, the total expenditure of N9.1 trillion is 7.36 per cent of GDP and is likely to be as devastating as being bandied. It is now trading above $78 per barrel, a three and half year high is comforting to markets and policy makers. The naira is expected to stabilise after initial fears and jitters that saw it slide to N366 per dollars.

The MPC members were faced with the choices of maintaining status quo, tightening or easing monetary policy. Amid strong arguments for the three positions, the choice of seeking further clarity on the evolution of major macroeconomic fundamentals culminated into a decision of holding policy rates constant, while allowing for policy flexibility as developments unfold in the macroeconomic space. In particular, the committee highlighted the impact of monetary policy normalization in the US with a number of currencies in emerging markets experiencing pressure already.

 

What Analysts Say

Chief Economist for Africa at Standard Chartered Bank Razia Khan while commenting on the decision of the MPC pointed out that while ordinarily there ought to be some concern about the inflationary impact of pre-election spending; current conditions in the economy make it difficult to overplay the threat of much higher inflation.

“Inflation is on a down trend, courtesy of recent forex 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 if it became clear that pre-election spending – in its multiple forms – was likely to be a problem.

“However, the CBN is especially concerned about investor profit taking and the likelihood of capital outflows at this point in time. We interpret the decision to keep all rates unchanged as suggesting that forex stability – even with oil back at $80 per barrel – remains paramount, and the CBN will not do anything to risk this. Not even easing, when the opportunity presents itself.

“The CBN also seemed to indicate that it remained uncertain of the monetary transmission mechanism even if it did cut the policy rate. While the MPC continues to hint that easing remains on the cards when conditions eventually permit it, there is far less clarity on when everything might eventually fall into place.”

Analysts at Renaissance Capital say they foresee that there would be no change in the policy rate until around the July and September meetings. “We see the policy rate being cut by one percentage point at the July and September meetings, respectively, bringing it down to 12 per cent at the end of 2018. This is not likely to have a meaningful policy easing effect, as open market operations will keep yields elevated,” it added.

The financial advisory firm revealed that at a conference it held recently where its officials interacted with some bankers in Lagos, “the banks said lending rates were unlikely to fall on the back of rate cuts, as Treasury Bill yields are of greater influence”.

On his part, Barister Chukwuemeka Eze, a Lecturer at the Banking and Finance department of Nassarawa State University noted that the MPC is not likely to cut rates soon unless the narration of the Nigerian economy changes for better. While economic activities have improved, growth slowed down in the first quarter of 2018 as the CBN governor noted that the economy could do more with policies directed at improving growth and development.

Analysts at CSL Stockbrokers Limited noted that the “MPC does not want to prompt a reversal of portfolio inflows by cutting rates too quickly and is reluctant to reduce rates until inflation is at the bank’s targeted single-digit level”.

“The newer explanation revolves around fiscal policy. With only a few rates setting meetings left before the election campaign kicks off in earnest, the question then becomes – is the window for easing policy closed or about to close?”

On his part, Senior Economist at Exotix Capital, Christopher Dielmann said the MPC decision was largely based on the high level of inflation that continues to plague the country as well as rising US treasury rates painting the macro backdrop to this decision. “As growth continues to lag and inflation falls towards single digit, we expect a policy rate cut as early as the MPC’s next meeting in July.”

 

Expectations On Rate Cut

The CBN Director of Other Financial Institutions Department (OFID), Mrs Tokunbo Martins had earlier in the year mentioned that the apex bank is working on a gradual lowering of interest rate one that would  be gradual.

The federal government and the central bank of Nigeria are doing everything possible to bring down interest rates. For instance, if you look at the yield for the20 year federal government bond it has come down from almost 20percent to 13 per cent.

“Even the yields on treasury bills is coming down and the reason it is coming down is because the federal government is making a deliberate effort to reduce borrowing internally and increase borrowing internationally for two reasons because they don’t want to crowd out borrowers here and because it is cheaper to borrow abroad. Crowding out borrowing here means the interest rates so much higher for borrowers locally.” She stated.

With the budget implementation expected to commence soon alongside election spending, inflation which has been dropping is expected to rise but still stay within the 14 percent range. Therefore the probability of the MPC cutting rates ahead of the 2019 elections is remains low with lending rates in the banking industry hovering around 27 and 30 per cent which it currently is.



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