The decision of the Monetary Policy Committee of the Central Bank of Nigeria to hold rates at a high of 14 per cent, the rate at which it has been since July 2016 despite calls for a cut in rates. BUKOLA IDOWU writes on the views of analysts on the MPC decision and their projections.
When the Monetary Policy Committee of the Central Bank of Nigeria rose from its two day meeting on this week, its decision to maintain status quo came as no surprise to Nigerians particularly financial analysts, many of who had predicted that the committee will continue to hold rates.
Announcing the decision of the committee, the governor of the CBN, Godwin Emefiele said due to headwinds confronting the domestic economy and the uncertainties in the global environment, the Committee decided by a vote of six to two to retain the Monetary Policy Rate (MPR) at 14 per cent, Cash Reserve Requirement (CRR) at 22.5 per cent, Liquidity Ratio at 30.00 per cent and the asymmetric corridor at +200 and -500 basis points around the MPR.
There has been calls, particularly from the real sector for a cut in benchmark interest rates so as to bring down the cost of funding for manufacturers. Recently, the Nigerian Employers Consultative Association (NECA) had called on the apex bank to lower interest rates and reduce the Monetary Policy Rate (MPR), which has been kept at 14 percent since 2016.
The association’s explanation was that the negative implication of the current interest rate policy is the phenomenon of “crowding out” of private sector access to credit, adding that manufacturers and other employers of labour have had to cope with a triple whammy of recession, high inflation and high interest rates caused by the wrong policy choices made by the monetary authorities.
According to the President of NECA, Larry Ettah, while it is accepted practice in economic management in most jurisdictions that the correct posture in a recession is a reflationary fiscal policy and monetary easing, including reducing interest rates, “instead the CBN has maintained tight monetary policy and raised interest rates.
“We are of the view that this approach is sub-optimal and has failed. It is based on an erroneous assumption that tight monetary policy would constrain inflation and temper pressures on the naira. Instead the actual experience confirms that Nigerian inflation is driven by cost elements usually currency devaluation and food and energy prices, while Naira values are shaped by oil prices and the FX reserves rather than monetary conditions, especially as CBN has maintained administrative control of the currency value.”
Although the MPC had similarly expressed concern over the increasing fiscal deficit estimated at N2.51 trillion in the first half of 2017 and the crowding out effect of high government borrowing, Emefiele said the argument for holding is largely premised on the need to safeguard the stability achieved in the foreign exchange market, and to allow time for past policies to work through the economy.
Specifically, he said the MPC considered the high banking system liquidity level; the need to continue to attract foreign investment inflow to support the foreign exchange market and economic activity; the expansive outlook for fiscal policy in the rest of the year; the prospective election related spending which could cause a jump in system liquidity, etc.
Although, there has been projections that the country would officially be out of recession when the National Bureau of Statistics release the second quarter GDP figures, analysts hold the same view that the improvement recorded by the country’s economy is still fragile and needs to be protected.
Head of research and investment advisory at SCM Capital Limited, Sewa Wusu, commenting the outcome of the July meeting of the MPC said while a further tightening is not an option to consider now, a cut in rates will discourage foreign investors and upset the calm that has been recorded at the foreign exchange market.
Having started the year on a highly volatile note and a huge gap at all the different ends of the foreign exchange market, the CBN through its various polices and a high MPR has been able to sustain foreign investors’ interest in the Nigerian market and achieve rates convergence.
Wusu noted that cutting rates now would counter the gains the BN has been able to achieve in respect to stability in the foreign exchange market, where rates have been able to converge. He stated that a cut in rate now would make the goal of wooing foreign investors into the economy to drive forex liquidity and spur growth in the economy would become more challenging. He however raised concerns on the outlook of external factors on the economy.
“What is of concern right now is the external outlook, the oil price. It is like Nigeria is now being capped by OPEC to cut production and if they do that we are going to lose revenue because they capped our production to 1.8 million barrels per day, this will be a pressure for us. Also if the oil price tumbles, our foreign exchange earning capacity will weaken.
Managing Director, Chief Economist, Africa, Global Research, Standard Chartered Bank, Razia khan, who stated that decision did not elicit any surprise, said “in our view, the MPC was correct to avoid the temptation to ease policy prematurely.
“Although inflation has decelerated, the MPC commentary still suggests that this might be substantially due to a base effect, which may not be long-lasting. The MPC expects a moderation in that base effect come August, but this may be offset by the positive impact of the harvest in Q3, and some deceleration in food price inflation.
“Our base case remains for Nigeria’s policy rate to be kept on hold at 14 per cent through to the end of 2017, even as year on year inflation decelerates further. This will be necessary in order to support the nascent NAFEX forex regime, especially with the pledge to cap Nigeria’s oil output at 1.8mn bpd. Stabilisation of the economy will require ongoing confidence in the availability of forex. Given external pressure, the only way to achieve this will be for a modest real tightening of the policy stance.”
O his part, the Managing Director and Chief Executive of Financial Derivatives Company Limited, Bismarck Rewane noted that the CBN’s decision confirms its preference for exchange rate stability over growth stimulation. The apex bank is of the view that with a high marginal propensity to import, an increase in liquidity will magnify the pass-through effect of imported inflation.
“Furthermore, with fiscal injections such as the Paris club refund and budget disbursements, the resulting increase in liquidity in the system could stoke inflationary pressures and lead to a buildup in demand pressure in the forex market. Also, the N3.4 trillion of promissory notes, if mismanaged, could be a trigger for runaway inflation.
“In adopting a wait and see approach the CBN will be able to track the effectiveness of the Investors and Exporters forex window, the inflationary path and the growth trajectory. We do not expect the decision to have any major impact on the markets as it has already been factored in.”
He noted further that the MPR as an anchor rate that is having less of an influence on market participants as the rates for T/Bills seem to reflect the cost of borrowing. “The MPR really has no impact on the investment and savings function of households and firms. Nonetheless, an accommodative policy is necessary at a time when growth is paramount, as it sends the right signals to economic agents.”
Khan on her part however noted that the debate on cutting rates may have started within the committee. Two of the eight members at the meeting had voted for a cut in rates, giving hope for a cut in rates soon.
To her, while there is no basis for the belief that easier monetary policy from the CBN will somehow have a meaningful effect on debt service costs, the loss of credibility might even raise the risk premia on Nigerian debt, driving higher interest rates over time. She furthered that easing now would not do much to lift private sector credit growth, when there are bank-specific issues that must be dealt with.
According to Bismarck, given increasing political pressure to lower interest rates to encourage growth, the CBN may yield and thus review the MPR at its next meeting. “Nigeria’s increasing debt service burden (70 per cent of independent revenue) is becoming an impediment to fiscal consolidation. This is likely to force a review of the interest rate policy in the short to medium term. A reduction in MPR may be more likely if Q2 growth figures released on August 23 is positive.”
Wusu of SCM Capital, along with the Head of Research at Afrinvest West Africa Limited, Robert Olatunde, however look towards a cut in rates by next year, saying the apex bank would continue to hold rates this year to ensure that the gains of the forex market as well as the economic recovery is solidified before a rate cut.
Olatunde who projects that a rate cut is most likely to come by the second quarter of 2018 noted that the decision to hold rates is “shared by the CBN and other committee members who are within the CBN and most of those who have voted for reduction in rates are independent members.
“Until the CBN itself signal the reduction in rates by reducing Open Market Operations or Treasury Bills rate, the vote of independent members who are about four, even if they all vote for a reduction, the CBN in-house staff, who in most cases vote in the same direction, will prevail. So if the CBN does not signal a reduction in rates, a cut in rate by one or two outliers it will not hold sway.”
FXTM’s Lukman Otunuga, on his part believes that Nigeria’s ongoing mission to diversify away from oil reliance, as well as a sharp drop in oil which triggered a currency crisis, have encouraged the Central Bank of Nigeria to maintain its key interest rates at 14 per cent.
Although the nation still remains exposed to external risks, there has been optimism over the economic landscape stabilizing, with the improving macro fundamentals fueling speculations of a potential economic rebound by the end of 2017.