CBN signals sustained tightening in near term as it holds MPR steady at 14%

The Central Bank of Nigeria (CBN), on Tuesday retained the Monetary Policy Rate (MPR) at 14 percent for the fifth straight time, and signaled it may continue to hold rates in the near term unless it sees inflation begin to trend towards its 6-9 percent target band and the naira achieves a commendable level of convergence.

The CBN refused to alter the current monetary  policy configuration, rather voting to also retain, Cash Reserve Ratio  Cl (CRR) at 22.5 percent as well as Liquidity Ratio at  30 percent.

In a wait and see approach, the CBN equally left the  Assymetric corridor around the MPR unchanged  at +200 and -500 basis points.

This is the fifth straight hold on key rates as the CBN governor, Godwin Emefiele said the policy retention is intemded to allow the existing policies to fully achieve their intended goals and objectives.

The CBN last jerked up MPR by 200 basis points to 14 percent in July 2016 in a tough decision then that favoured taming inflation as against growth,

The CBN is particularly pleased with the gradual receding of inflation which moderated marginally to 17.24 percent in April as against 17.26 in March 2017, but worries that, the rate was still significantly above the 6-9 percent policy reference band.

“And I am delighted that since beginning is the year, the country is seeing a downward trending of inflation. We are confident that as inflation gains continue to the point of trending towards the 6-9 percent band coupled with anticipated naira exchange rate convergence, the monetary authorities can then begin to consider loosening rates,” the governor stated, briefing on the outcomes of the two days MPC meeting in Abuja.

 Emefiele said through various segments of the economy are calling for reduced rate, that present economic aggregates do not give room for monetary to authorities to consider easing of interest rates.

The IMF and other international lenders insist that Nigeria need to tighten rates further, but she said rather than tighten, the monetary policy can only hold and watch given that there had been a consistent tightening before adopting a hold strategy.

But the Emefiele explained the monetary authorities’ position that  inflation becomes counter productive once it moves higher than a particular limit. “once inflation goes beyound 11-12 percent, it becomes growth retardant, so no matter whatever action is taken to stimulate growth does not work,” the governor explained.

Emefiele further explained that in taking the decision, the MPC also contemplated the prospects of further tightening monetary policy should need arise, but noted however that further tightening would widen income gap, depress aggregate consumption and adversely affect credit to the real sector of the economy.

The committee on the other hand noted.that the cost of capital interest rate in the economy remains high and not helpful to growth.

“Nevertheless, against the backdrop or unclear outlook around key economic  activities, especially food production, and some optimism about current deceleration of inflation, as well as relative stability in nara exchange rate, the MPC was reluctant to alter the current policy configuration in any fundamental manner,” Emefiele stated at the briefing.

The governor said MPC members were also, concerned that loosening rate would exacerbate inflationary pressure and diminish gains so far achieved with the exchange rate of the naira.

Emefiele said there was also a convincing argument that loosening would further increase the negative real interest rate as the gap between interest rate and inflation widens.

The regulator which is currently driving a conversion in different foreign exchnage rates also seems pleased with the relative stability in the naira exchange rate across all segments of the economy and market and the improved prospect of forex inflows.

Emefiele said though the CBN will not determine the convergence rate but is quite the CBN expects that rates to converge at a lower rate other as faster.

“You will observe that about three months ago, that market was above N500/$, but today, we have started to see a downward trend from that level to as low to at some point, N375/$, N370 and now hovers between N 375 and N385.

“That for us is a significant achievement in the direction of convergence of rates,” he stated.

The CBN is also positive about passage of the 2017 budget as it urged the authorities to ensure its judicious implementation, especially the capital budget in linseed with the Economic Recovery and Growth Plan.

On the financial stability outlook, the committee noted that in spite of the banking  sector resilience, the weak macro economic environment continues to exert pressure on the system.

The Committee therefore urged the CBN to intensify surveillance to tackle emerging vulnerabilities.

It also asked the banks to step up credit to the private sector to support economic recovery and  convey a positive feedback to the financial system.

In consideration of the challenges weighing down on the domestic economy and the uncertainties in the global environment, the committee decided by a unanimous vote of 8 members in attendance to retain the Monetary Policy Rate at 14 percent, alongside all other policy parameters, ” Emefiele told reporters.