MPC Again Retains MPR At 14% To Avoid Unintended Consequences

Photo caption: Moses Tule, Director, Monetary Policy Department, of the Central Bank of Nigeria (CBN); new members of the Monetary Policy Committee (MPC) Dr. Aliyu Rafindadi Sanusi and Dr. Robert Asogwa, MPC members; CBN Deputy Governors, Lametek Edward Adamu and Adebayo Adelabu (Operations); CBN Governor, Godwin Emefiele; Deputy Governors, Dr. Okwu Joseph Nnanna, (Financial System Stability); and Mrs. Aisha Ahmad; Prof. Adeola Festus Adenikinju, another MPC member; as well as Mrs. Alice Karau, Actingg Director, Corporate Secretariat, CBN; at the CBN Head Office, Abuja, on Wednesday, March 28, 2018, following the assumption of duty of the new Deputy Governors and MPC members
Photo Credit: Isaac Okorafor, Acting Director, Corporate Communications Department, CBN.

For the umpteenth meeting since its November 2015 rate cut, nine members of the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) rose from its much anticipated first meeting of 2018 deciding by a unanimous vote to once more retain the rates against popular expectation among several economic analysts.
At the end of its meeting on Tuesday, the committee chaired by Godwin Emefiele, CBN Governor and chairman, and comprising the four CBN deputy governors and four MPC members elected to keep the benchmark Monetary Policy Rate (MPR) at 14%; Cash Reserve Ration, 22.5%; Liquidity Ratio, 30%; and the Asymmetric corridor, +200 and -500 basis points around the MPR.
This, he said, was to prevent unintended consequences arising from the expected impact of the 2019 general election-related spending, amidst the low tax revenue efforts, as well as rising yields in the advanced economies, besides other happenings in the U.S and UK which suggest interest rates in the short to medium term (both countries together account for a sizable chunk of Nigeria’s foreign direct and portfolio investment inflow).
In a communique at the end of the meeting read by Emefiele, the committee noted that although “further tightening would strengthen the impact of monetary policy on inflation with complementary positive effects on capital flows and exchange rate stability, nevertheless, it could potentially dampen the positive outlook for growth and financial stability.”
Members were also of the belief, he continued, ‘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,” he noted, just as members argued that the “loosening could worsen the current account balance through increased importation. On the argument to hold, the Committee believes that key macroeconomic variables have 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.”
Another variable that encouraged the decision to hold rates despite the general improvement in macroeconomic conditions, he noted further, was the rather slow pace of moderation in food inflation so far.

Food Inflation
The meeting also took note of the potential risk of a pass-through from rising global inflation to domestic prices, even as they “expressed confidence that the tight stance of monetary policy would continue to complement other policies of government in addressing some of the structural issues underlying the stickiness of food prices.”
The 14% policy rate, it was observed, is “tight enough to rein-in current inflationary pressures,” just as the committee reaffirmed commitment to price stability conducive to sustainable and inclusive growth.
While noting the satisfactory implementation of the Federal Government’s Economic Recovery and Growth Plan (ERGP) in an effort to stimulate economic recovery, the MPC called for a quick passage of the 2018 Appropriation Bill by the National Assembly. This, members believe, will “keep fiscal policy on track and deliver the urgently needed reliefs in terms of employment and growth for the citizenry.”

Bloating Contractor Debts
While also noting the relatively strong balance sheets of Nigeria’s deposit money banks’ and the stable outlook, in spite of the concentration of non-performing loans in a few sectors, a situation it observed was satisfactorily being addressed by the CBN, the MPC also urged government to pay off its huge contractor debts. When this happen, members believe, a sizeable portion of the non-performing loans among banks will be addressed as the contractors can then repay their bank debts.
That notwithstanding, the MPC urged the CBN “to strengthen its supervisory oversight and early warning systems to promptly identify, monitor compliance with extant prudential regulations, sustain macro-prudential policy and manage emerging vulnerabilities in the banking system.”
Members equally reiterated the CBN’s commitment to deliver low interest credit as evidenced in its bold steps to adopt unconventional monetary policy to aid credit flow to vulnerable and growth enhancing sectors of the Nigerian economy.
They therefore enjoined the CBN to continue supporting and encouraging “credit delivery at single digit interest rate through other mechanisms in the interim, while encouraging the banking system to establish frameworks to increase credit delivery to the employment generating sectors of the economy.”
In view of available data and evolving macroeconomic indicators, the MPC therefore expressed commitment “to revisiting its decisions in the short to medium term as the fundamentals evolve.”
The committee called for strong restraint on Federal Government domestic borrowing so as not to crowd out, and then lower the cost of credit to the private sector.
This followed the observed continued low-level bank lending that “remains a constraint to growth of the real sector of the economy,” the committee urged the CBN management to continue providing the required policy impetus to engender improved credit delivery by the deposit money banks to the economy.

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