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Why CBN Maintains Status Quo On Monetary Policy Rates – Experts



In line with expectations that benchmark interest rate will remain unchanged by the end of the meeting of the Monetary Policy Committee of the Central Bank of Nigeria (CBN) last week, all 11 members of the committee present at the two-day deliberation voted to maintain status quo.

This means that the Monetary Policy Rate, (MPR) which is the benchmark interest rate was left unchanged at 14 per cent, Cash Reserve Ratio retained at 22.5 per cent, Liquidity Ratio unchanged at 30 per cent and the Asymmetric band left at +200 bps and – 500 bps around MPR.

The unanimous decision of the committee members was a shift from previous meetings, where some of the members had called for further tightening. At the meeting held in September this year, three members voted for a 25bps increase in MPR and another three suggested a 150bps hike in CRR as at September while two members suggested a rate hike in the July meeting.

According to the CBN Governor, Godwin Emefiele, the committee’s stance not to tighten monetary policy rates was hinged on the need to further stimulate growth in the economy. The CBN is projecting a 1.75 per cent growth for 2018, lower than International Monetary Fund (IMF) forecast of 1.9 per cent and Afrinvest forecast of 2.1 per cent.

Emefiele noted that while tightening was considered on the fact that it will strengthen the stability of the foreign exchange market, the MPC “was however convinced that this would simultaneously dampen investment growth, widen the output gap, depress aggregate demand and weaken output growth.”

With the decision to hold, analysts believe that the CBN would be deploying administrative measures to stem expected liquidity that may arise from holiday and electioneering spending. According to the managing director and chief executive of Cowry Assets Management Limited, Johnson Chukwu, the decision to hold is expected to support the attainment of domestic economic growth projection.

“We believe inflationary threats from Christmas spending and foreign portfolio investments outflows could be tamed using Open Market Operations. We also expect a status quo policy pronouncement when next the MPC meets in January 2019 – despite upside risk to inflation from expected increase in political spending as such risk should be short-lived.”

Likewise, analysts at Afrinvest West Africa Limited say they expect the CBN to continue to manage system liquidity to guide desired rates in the fixed income market. “While this may be insufficient to stem capital flow reversals ahead of the elections, the recently issued $2.8 billion Eurobonds provide additional buffers for the CBN to sustain foreign exchange sales and, in turn, exchange rate stability in the near-term.”

Afrinvest analysts while noting that they align with the stance of the MPC to maintain status quo, expressed worry that there could be a resurgence in foreign exchange demand management. “This can potentially restrict imports, fuel inflationary pressures as goods become scarce and ultimately constrain growth.”

On his part, research analyst at FXTM, Lukman Otunuga noted that a combination of oil price uncertainty, falling reserves, lingering inflationary pressures, an appreciating Dollar and other external risks have forced the CBN to maintain the status quo on monetary policy.

While anticipating a rate cut in the first quarter of 2019, Otunuga noted that some key prerequisites must be achieved for a cut in MPR. With inflation slightly down to 11.26 per cent in October, he said “inflationary pressures need to moderate further while economic growth must display further signs of recovery.

“Although the nation remains on a quest to diversify from Oil reliance, a fair chunk of government revenue is still realised from oil sales. With Oil trading at depressed levels, its impacts are likely to be felt on the economy and Naira exchange. If the economic conditions brighten before the presidential elections next year, the CBN still has a chance to cut rates in a bid to simulate growth” he stated.

The value of the naira has remained relatively stable as the CBN continues to keep up supply with its regular interventions. This has however seen the external reserves of the country deplete to $41.52 billion as at November 22, 2018.

In total the 30 days moving average of the reserves has dropped by 13.2 per cent from its highest point this year. External reserves had hit its highest level in five years in May this year reaching $47.865 billion, a level it last achieved in April of 2013 when it was $47.9 billion. However it has consistently declined with the 30 days moving average dropping to $41.73 billion as at November 9, 2018.



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