CBN’s MPC meeting begins today amid weak growth, rising inflation

The Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) begins its two-day meeting today against the backdrop of weak domestic growth, rising inflation, and largely unfavourable global economic conditions.

This is coming on the heels of the release of two important, but disappointing data in the last two weeks by the National Bureau of Statistics (NBS). Economic growth in the last quarter of 2015 fell to its lowest level in about 17 years, at 2.11 percent, while inflation rose to a double-digit figure of 11.4 percent in February, first time in almost 3½ years, from 9.6 percent in January.

However, the context in which the meeting holds is made complicated by continuous global economic whirlwinds and the last week rejection by Iran for a freeze on oil exports at January 2016 levels that has dampened the recent respite in oil prices.

In response to disappointing GDP growth rates in the second and third quarters of 2015, the MPC policy measures of November 2015 and January 2016 were fairly predictable.

In November 2015, the Monetary Policy Rate (MPR) – the official interest rate – was cut from 13 percent to 11 percent. Cash Reserve Requirement (CRR), the specified minimum fraction of total deposits of customers, which commercial banks are required to hold as reserves with the CBN, was reduced from 25 percent to 20 percent. MPR corridor, which sets the limit on the interest rates with which commercial banks can deposit excess funds with the CBN for interbank lending purposes, was changed from a symmetric corridor of +/-2 percent to an asymmetric corridor of +2 percent and -7 percent. The lower band of -7 percent was aimed at discouraging commercial banks from dumping excess funds with CBN as opposed to lending to the public.

In its January meeting, the Committee retained its November decisions: leaving the MPR at 11 percent, MPR Corridor at +2 percent and -7 percent, CRR at 20 percent, and LR at 30 percent. This was against the backdrop that the tools deployed in the last MPC meeting needed time to take shape. These measures were aimed at increasing liquidity and encouraging lending to the private sector.

According to data from CBN, the monetary effect of the MPC decision was releasing a total of N771.4 billion to the banking system for lending to the real sector.

However, the increased liquidity in banking system has been absorbed by the public sector, leaving lending to the private sector relatively flat at a less than 1 percent increase.

Lending to the public sector will continue to strengthen at the expense of the private sector, owning to the fact that banks currently do find lending to the public sector less risky. Moreover, a considerable time lag exists between monetary policy interventions and its effects on the real sector of the economy, which could help explain the slow pace of credit expansion to the private sector.

Financial analysts at Afrinvest do not expect the ease in monetary policy to translate into increase in lending to the real sector in the short term, due to high risk in retail/SME loans.

However, both the November and January decisions taken by the Committee were relatively easy. The 249th meeting that starts today will present more difficult choices as the committee is caught between weak growth and rising inflation. One of the major challenges is the double-digit inflation, which the CBN must deal with now to provide room for future monetary easing that will kick start economic growth.

With waning growth, higher inflation rate limits the ability of the central bank to intervene in the economy. The inflationary pressures are further worsened by rising costs of doing business, occasioned by worsening fuel scarcity, declining power generation and inefficient distribution systems, as well as general infrastructural deficiencies. But the biggest challenge for CBN, now, is how to balance the opposing forces of weak growth and rising inflation.

Although analysts’ expectations are mixed, one consensus expectation is that MPR, the benchmark interest rate, would be left unchanged. For instance, Ogho Okiti, the CEO of Time Economics, an economic consulting firm based in Abuja, said, “having focused on easing liquidity in the last two meetings, the MPC will be constrained to make drastic changes to those parameters. What it may now do is look for other tools that may help return inflation to its single digit target in the near term.”

On devaluation, the expectation is that it is unlikely the naira will be further devaluated at the meeting. The increasing widening gap between the official and the parallel rates has remained flat in the last few weeks, compared with January and February.