For the ninth consecutive time since July 2016, the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) on Tuesday rose from its second meeting of the year with a majority eight-to-one vote to keep Monetary Policy Rate (MPR) unchanged at 14%. Also, they voted to keep Cash Reserve Ratio (CRR) at 22.5%; Liquidity Ratio at 30%; and Asymmetric corridor at +200 and -500 basis points around the MPR.
This was contrary to expectations among some analysts that the benchmark Monetary Policy Rate (MPR) would be cut to 12 or 13%, after the latest data by the National Bureau of Statistics (NBS), last week showed that inflation for the month of April fell to 12.48%, among others.
In a communique at the end of the two-day MPC meeting, members while acknowledging arguments for a rate cut argued that economic growth recorded so far remains largely fragile and in need of further reforms and stimulus.
Members noted, for example, the late passage of the budget by the National Assembly, six months after it was presented by President Muhammadu Buhari, as well as expected huge spending ahead of the 2019 general elections, amidst inflation concerns.
According to the communique signed by Godwin Emefiele, the CBN Governor, “the predominant argument for a hold at this time is to await more clarity on the evolution of key indicators i.e. the passage and implementation of the budget, economic activities, and traction in fiscal policy in 2018.”
Members, he continued, were convinced about the need for a new impetus for increased bank lending, while working with the CBN to adopt innovative ways to increase growth of credit, “including a reduction in the policy rate when conditions for such a decision arise.
“The MPC noted that at single digit inflation and higher reserve levels, the risks associated with a policy rate reduction under conditions of wavering foreign capital inflows and an unstable oil market, including other severe uncertainties, could be better managed to deliver macroeconomic stability in Nigeria.”
The MPC, the communique continued, urged the various levels of government to accelerate the settlement of contractor debt and salary arrears as well as facilitate the quick implementation of the 2018 Federal Government budget.”
Continuing, the committee also warned about the “high level of uncertainties that could arise from the fiscal operations of government in the near term. Amongst these are: when the implementation of the 2017 budget will end; dwindling revenue projections; as well as the possibilities of full implementation of the 2018 Federal budget. Consequently, we expect a likely bunching of government spending in view of the late passage of the budget and government’s commitment to honour prior obligations. This could pose a serious challenge to the CBN’s price stability mandate.
In view of the election spending, the committee believes “tightening would ensure the mop-up of excess liquidity. Mindful that despite the moderation in inflation, the current inflation rate is still above targeted single digit and that real interest rate only turned positive in the review period. The objective of the policy stance therefore, would be to accelerate a reduction in the inflation rate to single digit to promote economic stability, boost investor confidence, and promote foreign capital flows with complementary impact on exchange rate stability.”
The committee, Emefiele said, “believes that raising interest rate would, however, depress consumption and increase the cost of borrowing to the real sector. Moreover, such policy would make deposit money banks to re-price their assets.”
Revenue is also expected to rise given the favourable prices of crude oil and improvements in non-oil revenue, particularly taxes. In addition, production levels have also increased in recent times and this is expected to be maintained.
Members also warned that while factors that lifted the Nigerian economy from recession remain in place, there is need for speedy implementation of the 2018 budget, improve the security situation, ensure continued foreign exchange market stability, added to a sustained increase in crude oil production and prices.
“The Committee noted the downside risks to the outlook to include: the late approval and implementation of the 2018 budget; farmers-herdsmen conflict; weak demand and consumer spending associated with outstanding salaries and contractor debt; and the growing level of sovereign debt.”
The committee expects rates to remain stable in the foreign exchange market in the near-term, given the CBN’s sustained interventions, rising oil prices and global economic developments.
Members however called for a careful calibration of policy so as to moderate the trend of capital outflows in an era of monetary policy normalization in the United States, amidst the bearish signs in the capital market associated with profit taking activities of investors.
The committee expressed satisfaction “with the progress made with the implementation of the Economic Recovery and Growth Plan but were concerned on the effect of delay in the passage of the 2018 Appropriation could derail the programme and urged the Federal Government to sustain its implementation to further accelerate the economic recovery thus far achieved.
“The Committee urged the government to set the machinery for the effective implementation of the 2018 budget to further stimulate the economy. It also encouraged the Government to sustain current efforts at boosting tax revenue generation notwithstanding the increase in crude oil and other commodity prices. The MPC, however, noted the potential effects of expansionary fiscal budget of 2018 and the liquidity impact of rising FAAC distribution, following increase in the prices of crude oil as well as the build up in election related spending towards the 2019 general elections.”
Given the nation’s poor transmission mechanism arising from structural rigidities, reducing the benchmark rate “may not necessarily transmit to lowering market lending rate on account of the high cost of doing business. Loosening, members argued further, “could worsen the current account balance through increase in importation, margin lending, lowering of risk evaluation in accessing loans which will drive up loans and likely increase in NPLs with potential negative consequence on the stability of the banking industry.”
“The committee, while arguing for a hold, observed that the downside risk to growth and upside risk to inflation appears balanced as growth is improving while inflation is moderating. Maintaining the current policy stance would sustain gradual improvements in both indices. It was noted that there is need to see how all the components of GDP would evolve in the second quarter of 2018 in order to gain greater clarity on the direction of monetary policy.