Ahead of the next Monetary Policy Committee meeting in July, several analysts have agitated for a cut in the monetary policy rate, since the rate at which goods and services are sold is increasing slowly at 11.6 percent and gradually getting closer to the Central Bank target of a single digit.
According to them, the MPR correlates directly with the lending rates of commercial banks and when it is high (it’s currently at 14%), it results in exorbitant borrowing costs for the banks, and their private business customers.
They are of the view that a rate cut will largely help reduce commercial banks’ lending rate and thus, provide and free up more liquidity for banks to lend to the real sector of the economy.
However, BusinessDay checks have shown that banks may not be towing through this path. Hence, a rate cut might actually not reduce commercial banks’ lending rates.
Commercial banks charge as high as 30 percent to lend to its customers, while the argument for a cut in rates is for increased lending to the real sector, a lower benchmark interest rate would not result in increased lending by banks. Thus, bringing down the MPR will not translate to improve lending by the banks.
A Chief Executive officer (CEO) of one of the leading Nigerian banks, in an interview with BusinessDay disclosed that even if the committee reduces the MPR, lending rate by commercial banks will still remain unchanged.
“A rate cut will not necessarily make us reduce the rate at which we lend out but it might be an incentive because the key thing is to release the CRR so that the banks that have the liquidity will find a way of deploying it but if you tighten by holding CRR, will make money even more scare.
“So reducing rate unless you are going to legislate lending which we are no longer in that regime, cannot be sufficient to get banks to just lend but i think the banks should be allowed to make such decisions based on the reality that each bank faces.
“You have the CRR, you have the customers, you also have the liquidity and the opportunity you want to exploit therefore let me lend and make money.
Another bank CEO, who craved anonymity because of the sensitivity of the matter, said rate cut will still leave bank lending rate unchanged as there is nothing like patriotic lending because we feel there is need to grow the economy.
According to him, the banks will not use private money to grow the economy when they still see there are evident risks within the space. It is about the risk environment.
“Most of the companies that they would have lend to are struggling in terms of returns on their investment as they have to factor in the cost of power as well as infrastructure and by the time you factor in those things your business is not profitable and you cannot service your loan so the bank will not lend to you.
“For instance a lot of banks lent to the power sector during the privatisation but a lot of them got their hands burnt, so no matter how low interest rate comes, that will not translate proportionately to increase lending as long as they continue to see that risks.”
The monetary policy committee in its 216th meeting and the third for the year, voted to leave the key interest rate (the cost of obtaining funds from the Central Bank of Nigeria) at 14 percent for the 10th consecutive time since July 2016.
This singular effort was in a bid to cushion the effect of election spending, delay in budget implementation, and spiralling inflation which soared to an 11-year high in April 2016, following a big naira devaluation and an upward review in the retail price of petrol.
Data from the Nigerian Bureau of statistics (NBS) has shown that the rate at which goods are sold in the country has seen a 16 month of successive decline, from as high as 19 percent in January 2017 to 11.61 percent in May 2018, making it the third time that the inflation rate has fallen below the MPR at 14 percent.
However, with inflation rate cooling down to 11.6 percent, it is still above the CBN target of a single digit and with a great trajectory of heading north beyond this year June figure giving certain economic realities.
- Reasons for a likely hold in the MPR at 14%
1) Our back door analysis has shown that a rate cut will be unlikely as this would undermine foreign exchange inflow and stability in the foreign exchange market, which is what the committee would not want at a time like this especially since the country is approaching an election period.
2) Despite inflation seeing a downward trend, it is still above the CBN target of a single digit inflation and has the tendency of increasing beyond the June official result, due to developments in the domestic agricultural sector which may place upward pressure on prices if not checked.
Data from the National Bureau of statistics on the nation’s Gross Domestic Product has shown that the agricultural sector in first quarter 2018, recorded its lowest growth rate in the last 8 quarters since 2016.
In Q1 2018, growth in the Agricultural sector stood at 3 percent, representing a 1.23 percentage points decline when compared with the 4.23 percent growth that was recorded in the last quarter and a 0.39bps fall from the 3.39 percent that was recorded in the first quarter of 2017.
In 2016 it reached 4.1 percent and in 2017 3.5 percent, while over the past eight quarters the highest growth rate has been 4.5 percent y/y in Q3 2016 and the lowest 3 percent in Q1 2018, defying the transformation of the sector which has been the priority of the current and the previous administration
The reason for this decline in the sector is not farfetched especially giving the crisis that is being seen in the northern part of the country that are major producers of this farm produce.
The insecurity challenges in the food producing states in the country may be responsible for this development, and if the trend continues, food supply may drop leading to escalating prices. Thus, both local and imported food prices may place upward pressure on inflation rate.
3) Stocks in emerging markets have experience sell offs owing to pressure from interest rate hike in developed economics and markets of the world, the tension being generated by trade wars, the North Korean war threat, Italian political drama that is threatening the Eurozone and global push-back on US tariffs.
In light of these factors, it is only necessary for the MPC to keep a rate that is seen attracting to foreign investors and the 14 percent rate has been seen attractive any reduction might trigger more sell offs in the Nigerian stock market.
4) The federal government of Nigeria under the President Led-administration has just signed the N9.21 trillion appropriation bills into law. This invariable means that there will be enough money for Ministries department and agencies to execute and implement project, if not checked, might tell on the rate of inflation.
5) The agitation for a wage increase by to as high as N56, 000 from the current N18, 000 that is being paid meaning that the government will have borrow to cater for recurrent expenditure not accounted for in the budget. If this fall through might tell badly on inflation
6) The Naira has to be protected from any form of pressure especially given the fact that the dollar has strengthened any uptrend in inflation might put pressure on the naira.
- Reasons for a likely cut in the MPR
1) With the slight contraction in the Gross Domestic Product (GDP) of the Nigerian economy, recorded in first quarter of 2018, it points to the need for an expansionary policy to stimulate inclusive growth.
The country’s GDP growth in real terms shrunk 0.6bps to 1.95 percent in Q1 2018 from the 2.11 percent that was recorded in the preceding quarter, but showed a stronger growth when compared with the negative(-0.91)percent that was recorded in the first quarter of 2017 according to data from the National Bureau of Statistics.
Data from NBS shows that the oil sector contribution to the GDP saw an increase of 2.3bps to 9.61 percent in Q1 2018 compared to the 7.35 percent that it contributed in the preceding quarter thanks to rallying oil prices that averaged $66 per barrel alongside average daily oil production of 2.0 million barrels per day (mbpd), higher than the daily average production recorded in the fourth quarter of 2017 by 0.05 mbpd and
However, this could not be said of the contribution from the non-oil sector which contributes the bigger chunk of the country’s GDP.
In the first quarter of 2018, contributions from the non-oil sector shrunk 2.3bps quarter on quarter from 92.65 percent in Q4 2017 to 90.39 percent in Q1 2018, and this was largely due to negative contractions that were seen in the, Real estates, Trade, Public administration, Construction, Health and Social service, Administrative and support service, and the professional Scientific and technical Service sectors. As these sectors recorded -9.40, -2.57, -1.72, -1.54, -0.37, -0.52, -2.53 respectively.
We believe that a more fiscal and monetary policy measures are required to stimulate the recovery in the economy in order to generate employment opportunities.
2) Inflation rate has seen a downward trend showing positive indications that the economy is moving in the right direction, which might likely tempt the committee to cut the key interest rate since that was the major focus the rate was held in the first place, as this might help like an incentive to encourage banks to lend to the real sector.
So generally the MPC will have to contend with all this factors on when to vote.
