• Saturday, June 15, 2024
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Analysts see rates unchanged as MPC begins most decisive meeting of 2016

As members of Nigeria’s Monetary Policy Committee (MPC) begin a two-day meeting today in what keen observers call the single most decisive meeting of the year, analysts are gauging what should be at the heart of the discuss by participants at the highest monetary policy making body.

The MPC will have two options from which to choose a path to rekindle growth in Africa’s largest economy as it slides into recession for the first time in 12 years.

The options before the 12-man committee chaired by Godwin Emefiele, the Central Bank of Nigeria (CBN) governor, are to either tighten credit to manage soaring inflation, or ease liquidity squeeze to induce economic growth.

There was a convergence among a group of 20 analysts polled in a BusinessDay survey to predict the outcome of the MPC meeting, as 18 weighed in favour of unchanged rates, while the remaining two saw a modest rise.

“The world over, interest rates are not hiked to control inflation when it is driven by cost shocks,” Tosin Ojo, head of research at consulting firm, Cardinal Stone Partners Ltd, said in response to questions.

“Rather than that, what the MPC should do is come up with ways to stimulate economic growth through the banking sector. Anything short of this could worsen the already bad shape of the economy,” Ojo added.

Inflation climbed to 16.5 percent (year-on-year) in June, and is at the highest since 2005 according to data from the Nigerian Bureau of Statistics (NBS).

High costs of energy and imported items were the drivers of June’s inflation, the NBS noted in a report published last week Monday.

“The big challenge is that the inflation is not being driven by a rise in demand but rather, by a leap in costs,” Abiodun Keripe, head of research at investment bank, Elixir Investment Partners Ltd said in an interview with BusinessDay.

At March’s meeting, the MPC hiked interest rates and Cash Reserve Ratio (CRR) to 12 percent and 22.5 percent respectively, to contain inflation which soared to 12.8 percent in the period from 11.4 in the month of February.

“There was no premise to hike rates then and there isn’t one now,” said Ayo Teriba, CEO of consulting firm, Economic Associates Ltd, by phone.

“In the last eight years, there has been no reason to raise rates because we have never had demand pull inflation. It has always been cost driven and would fizzle out with time,” Teriba said.

While a lean fraction of analysts say there might be a rate hike if the MPC gives inflation pre-eminence, most beg to disagree.

“I don’t think there will be a rate hike because liquidity is already being mopped up from the system,” said Bismarck Rewane, chief executive officer of Financial Derivatives Company Limited, in response to questions.

Some economists are of the opinion that the fiscal counterpart could serve as a cushion for the shortfalls of the monetary policy if interest rates are not sliced further.

Nigeria plans to spend its way out of a recession, with a record N6.06 trillion budget which was belatedly signed into law in March.

Such expansionary budgets are known to stimulate an economy by ramping up credit and boosting household spending, a dominant part of GDP by expenditure.

The International Monetary Fund (IMF) said this month, that  Nigeria’s economy could contract for the first time in more than two decades this year, as a fall in oil revenue and electricity shortages weigh on output.

The country’s economic problems were kicked up by capital controls imposed by regulators and a lack of policy direction by the new government which inhibited the flow of foreign investment.

With the 16 month-old hard peg out of the way, the naira slumped 51 percent last week Friday, trading at N300 per dollar, data from CBN’s website show.

Nigeria’s GDP growth rate contracted by 0.36 percent in the first three months of 2016 and “it appears impracticable that the second quarter would not follow suite, since factors that led to the contraction in Q1, intensified in Q2,” analysts say.

Combined with soaring inflation which beat analysts’ forecasts and the precarious state of banks which has subdued credit extension; the MPC may be in a tight spot deciding whether to hike Monetary Policy Rates (MPR) in reaction to inflation, or to ease it to induce credit flow in the economy.

“Indeed, it is a tight one. The MPC now has to contend with fighting off an economy from slipping into recession in an inflationary environment,” said Keripe.