The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) yesterday retained the interest rate at 14% even as it urges restraint on local borrowing.
MPC said the nation’s economic indications are looking positive, with the recovery of the economy strengthening in view of the return to growth of the Services Sector.
The reconstituted MPC made gave the hint yesterday at its 260th meeting held against the backdrop of strengthening global growth and improving domestic economic condition.
The committee based its forecast on the recent data by the National Bureau of Statistics that indicated, among other things, that real Gross Domestic Product grew by 1.92 percent in the fourth quarter of 2017 from 1.4 percent and 0.7 percent in the third and second quarters respectively.
The economy grew overall by 0.83 percent in 2017, it was learnt.
Aside that, the MPC chairman and CBN governor, Mr. Godwin Emefiele, announced that there was also a continuous improvement in the level of external reserves, which stood at $46.699 billion as at March 29, 2018.
Similarly, the All-Share Index (ASI) rose by 8.5 per cent from 38,243.19 on December 29, 2017, to 41,504.51 on March 29, 2018. Market capitalisation (MC) improved by 10.2 per cent from N13.61 trillion on December 29, 2017, to N14.99 trillion during the same period.
This was as the Committee said it decided, by a vote of all the nine members present at the meeting, to retain the Monetary Policy Rate (MPR) at 14.0 per cent alongside all other policy parameters. Consequently, the MPC voted unanimously to retain the MPR at 14.0 per cent; CRR at 22.5 per cent; Liquidity Ratio at 30.0 per cent, and asymmetric corridor at +200 and -500 basis points around the MPR.
There had been missed opinion on whether the apex bank should either tighten or loosen the interest rate along other parameters.
But Mr. Emefiele said while the Committee was of the view that further tightening would strengthen the impact of monetary policy on inflation with complementary positive effects on capital flows and exchange rate stability, it also felt that loosening would strengthen the outlook for growth by stimulating domestic aggregate demand through reduced cost of borrowing.
“This may, however, lead to a rise in consumer prices, generating exchange rate pressures on the currency in the process. The Committee also believes that loosening could worsen the current account balance through increased importation.
On the argument to retain the rates, the Committee noted that key macroeconomic variables had continued to evolve in a positive direction in line with the current stance of macroeconomic policy and should be allowed more time to fully manifest, the CBN said while addressing journalists at the end of the two-day meeting yesterday.
In reaching its decision, the Committee appraised potential policy options in terms of the balance of risks. The Committee also took note of the gains made so far as a result of its earlier decisions, including the stability of the foreign exchange market, the moderation in inflation rate as well as the restoration of economic growth.
Some of the indications include the fact that non-oil GDP grew by 1.4 percent in the Q4 of 2017 compared with a contraction of 0.16 percent in Q3 of 2017, “indicating that the economy is gradually returning to a part of sustainable positive growth,” Emefiele said.
The committee also noticed the continued positive outlook based on the manufacturing and non-manufacturing purchasing managers’ index which stood at 56.7 and 57.2 index points respectively in March 2018, indicating expansion for the 12th and 11th consecutive months. Inflationary pressure of the economy continued to moderate with headline inflation year-on-year receding for the 13th time.
According the committee, the effective implementation of the federal government’s Economic Recovery and Growth Plan (ERGP) and quick passage of the 2018 budget will continue to enhance aggregate demand and confidence in the economy.
The committee strongly urged the federal government to show restraint on domestic borrowing in order to lower the cost of credit to the private sector. In the same vein, the committee urged quick passage of the 2018 Appropriation Bill by the National Assembly, so as to keep fiscal policy on track and deliver the urgently needed reliefs in terms of employment and growth for the citizenry.
The body acknowledged that the continued low level of lending by banks remained a constraint to growth of the real sector of the economy and advised the management of the CBN to continue to provide the required policy impetus to engender improved credit delivery by the Deposit Money Banks to the Nigerian economy.
…Analysts Foresee Rate Cut At Subsequent Meetings
As the CBN left the benchmark interest rate unchanged amidst calls for a cut by the real sector, analysts say they expect the rate cut promised by the CBN governor to come on stream in subsequent meetings.
The Monetary Policy Committee (MPC) of the CBN, at the end of its first meeting of the year where half of its members are newly appointed, left the Monetary Policy Rate (MPR), which is the benchmark interest rate, unchanged at 14 per cent.
Head of Research and Advisory at Sterling Capital, Sewa Wusu, noted that despite the declining inflation, the MPC “considered the current anchor rate as tight enough to combat the pressures emanating from prices, particularly as election spending cycle draws nearer.”
According to him, the decision to hold rate was “just in line with expectations.”
Inflation rate had been on a steady decline since January last year, dropping to 14.33 per cent although it is still beyond the nine per cent target set by the CBN.
On his part, the managing director and chief executive of Cowry Assets Management, Mr Johnson Chukwu, expressed the hope that the MPC would adjust rates at its next meeting which is expected to hold in June.
“I believe that at subsequent meetings, if the macroeconomic indices subsist, that the MPC will see the need to adjust downward and adopt a more accommodative stance so as to improve rate of economic growth.”
He explained that if the MPC did not adjust the benchmark interest rate downwards before liquidity for pre-elections spending begin to hit the system, they would have no tool to curtail rising liquidity when election spending starts.
But the chief executive of CFG Advisory, Tilewa Adebajo, does not think that the MPC needs to consider the effects of the coming elections.
“Elections come and go and the responsibility of the policy committee is to be able to maintain financial stability which, despite the election, you must maintain and control,” he said.
The benchmark interest rate had been left at 14 per cent, a rate manufacturers say makes borrowing too expensive for them.
After its meeting yesterday, the MPC had advised the federal government to exercise restraint on domestic borrowing in order to lower the cost of credit to the private sector.
He also noted that the continued low level of lending by banks remains a constraint to growth of the real sector of the economy, as the committee called on the CBN to continue to provide the required policy impetus to engender improved credit delivery by the deposit money banks to the economy.
Last week, CBN director of Other Financial Institutions Department (OFID), Mrs Tokunbo Martins, had said that while the CBN planned to cut benchmark interest rate, the cut will have to be gradual.
Noting that there is a concerted effort by the CBN and the government to increase lending to the private sector, she cautioned that a lowering of rates would be a gradual process.
“Now the inflation rates have come down for fourteen executive months. It is currently at 14.33 percent so I am sure those interest rates would come down gradually. I cannot promise it would come down immediately like we all want.
“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 the 20-year federal government bond, it has come down from almost 20 percent to 13 percent.
“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 will be so much higher for borrowers locally. So I think that is one step in the right direction,” Mrs Martins said.
Non-passage Of 2018 Budget Fuels MPR Retention At 14% — Experts
Some financial experts have attributed the retention of the Monetary Policy Ratio (MPR) at 14 per cent by the Central Bank of Nigeria (CBN) to non-passage of the 2018 budget.
The experts, who spoke in Lagos, yesterday, noted that the absence of a fiscal policy direction in the economy made it inevitable for the CBN to decide otherwise.
The MPC rose from its first meeting in 2018, retaining the benchmark interest rate at 14 per cent, the Cash Reserve Ratio (CRR) at 22.5 per cent and the liquidity ratio at 30 per cent.
Also, the Asymmetric window was left at +200 and -500 basis points around the MPR.
Prof. Sheriffdeen Tella, a Senior Economist at the Olabisi Onabanjo University, Ago-Iwoye, Ogun said holding the MPR at 14 per cent was in the right direction, considering the non-passage of the 2018 budget.
Tella said that the build up to the general elections demands huge spending by politicians, adding that the CBN was careful not to allow excess liquidity in the economy to erode the gains of controlling inflation.
According to him, the apex bank need to watch the political behaviour and spending of politicians between now and June before contemplating any easing on the MPR as the nation’s fiscal policy is still shrouded in uncertainties.
The financial expert argued that the CBN had not foreclosed the notion of easing the MPR, adding that with an early passage of the budget and improved key fundamentals of the economy, a rate cut should be considered.
The don, however, explained that the economy was yearning for a rate cut to stimulate its productive sector, and allow for the expansion of Small and Medium Enterprises (SMEs).
Similarly, Alhaji Aminu Gwadabe, the President, Association of Bureaux Des Change Operators of Nigeria (ABCON), said that rate retention was a momentary response to the political and security challenges in the nation’s political economy.
Gwadabe said that the apex bank was very cautious in its decision, considering the uncertainties in the nations’ fiscal policy arising from the non-passage of the 2018 budget.
The ABCON chief, however, noted that a rate cut would bring the needed stimulus in the economy in order to revive the fortunes of the manufacturing sector.
The financial expert urged the CBN to urgently tackle the challenges of prevailing exchange rates in the market in order to sustain the gains recorded at the foreign exchange market.