Growing concerns about the uncertainty in the oil sector, occasioned by activities of pipeline vandals and the state of emergency in some parts of the North may have forced the Monetary Policy Committee to retain the Monetary Policy Rate at 12 percent.
Some analysts said yesterday that the extent of oil theft on the nation’s earnings and the likely weakening of the performance of the agric sector, despite the Central Bank of Nigeria’s estimate of a healthy level of foreign reserves, should serve as areas of concern, hence the cautious stance.
CBN governor, Sanusi Lamido Sanusi said, “The Committee considered and acknowledged the merits of option one, which is monetary easing, but rejected it as being premature, in view of the potential risk factors in the horizon posed by recent developments which would necessitate increased fiscal expenditure in the short-to-medium term, resulting in a resurgence of inflationary pressures.
Thus, by a majority vote of 7 members to 3, the MPC voted to maintain the current policy stance to retain the MPR at 12 per cent, with a corridor of +/-200 basis points around it; retain the Cash Reserve Requirement at 12 per cent and Liquidity Ratio at 30 per cent; with the Net Open Position at 1.0 per cent.”
In the final analysis, the Committee was convinced that in view of the successes achieved on all fronts – banking stability, low inflation, exchange rate stability, strong reserve buffers and recovery in the equities market, there is no reason at this point to change a policy that has worked so well.
However, the analysts expressed optimism that the new voting pattern which witnessed one new convert on the side of easing, signposts a likely shift of stance in the near future.
According to Razia Khan, analyst with Standard Chartered Bank, London, the “CBN’s action is in line with our expectation. This is despite the improvement in inflation, and the CBN’s view that single digit inflation will remain in place.”
Aligning with the CBN’s position, Khan said, “the two clear areas of concern by MPC are, first the extent of oil theft (and its impact on oil earnings) remains a worry. Despite the CBN’s estimate of a healthy level of FX reserves, with import cover thought to be c. 13 months , given recent budget augmentation using ECA proceeds, this is clearly something that will have to be watched. This may well have been a key factor contributing to a more cautious stance.
“Second, the impact of the recent state of emergency in the North is a cause for concern. While in the very near term, it may weaken agric sector performance in a fairly localised way (this is unlikely to impact on Nigeria-wide GDP, but risks to the price level should be watched), the potential need for greater spending has also forced the CBN to adopt a more cautious stance.”
She said that the development has further demonstrated the CBN’s “willingness to continue with a policy that has largely worked for it. Monetary policy is not overly tight, but the credibility of policy has allowed for greater inflows into Nigeria, triggering a rally in bonds, and allowing for the accumulation of FX reserves – or a more substantial buffer against future shocks.
“Nonetheless, the MPC vote, 7-3 in favour of keeping interest rates unchanged, demonstrates that there is a subtle but important shift underway on the MPC.”
Analysts at Renaissance Capital (Rencap) said the retention is positive for the naira, adding the decision was “in accordance with our expectation and the consensus view.”
The CBN governor at the post meeting briefing said he sees no reason to change a policy that is working and does not believe that monetary policy is too tight.
He added that the MPC believes the outlook remains relatively benign and expects inflation to remain in the single digits (in the short term) with the attendant macroeconomic stability.
The MPC also expressed concern about the uncertainty in the oil industry and the sector’s prospects, likely due to the drop in output since 4Q12. It also said that government spending is a risk to inflation and thinks military action in the north may boost spending.
According to the analysts “Although the MPC’s inflation outlook remains benign, we believe the increased risk to the naira due to a weaker oil sector, as well as the risk of an increase in government spending related to military spend in the North East of the country, reduces the likelihood of the MPC loosening monetary policy in the short term.”
