Analysts are scratching heads and wondering about the broader reform implications after the Central Bank of Nigeria (CBN) unexpectedly cut its monetary policy rate (MPR) by 50 basis points (bps) to 13.5 percent from 14 percent, Tuesday, citing the need to boost growth.
The move by the CBN to cut rates at this time creates more questions than it answers, according to Razia Khan, Africa chief economist at Standard Chartered.
“While FX stability has benefited both from rising oil prices and rising portfolio inflows into Nigeria, the cut today raises important questions about the government’s broader reform intent,” Khan said, pointing to two concerns.
First, the MPR cut comes following Senate approval of a sizeable minimum wage increase. Second, it remains to be seen what the move suggests about the likelihood of an imminent VAT hike or fuel price deregulation, according to Khan.
“Both are pressing, much-needed reforms – but the CBN’s rate cut today appears to suggest that these reforms, which may both exert upward pressure on the price level in the short-term, may not necessarily be imminent. This would be disappointing, especially for investors hoping for stronger reform impetus post-election,” Khan said.
At a press briefing after the two-day Monetary Policy Committee (MPC) meeting, Godwin Emefiele, the CBN governor, said six members of the 11-man committee voted to reduce the benchmark rate.
“A new direction has become imperative,” Emefiele, whose tenure as the CBN governor ends in July, said. “Given the relative stability in macroeconomic indicators, we needed to send a signal in the direction of supporting and accelerating growth.”
The move is the first rate cut since November 2015. The rate has been held at 14 percent since July 2016 to support the naira and curb inflation.
The regulator, however, retained asymmetric corridor around the MPR at +2 percent/-5 percent; Cash Reserve Requirement (CRR) at 22.5 percent, and Liquidity Ratio at 30 percent.
The move was a shock to many analysts who had expected a rate retention.
Some analysts argued that the CRR is a much more important determinant of the policy stance of the CBN and increased bank lending can only happen if more cash is freed up in the banking sector.
“It’s a signalling move,” Bismarck Rewane, an economist and CEO of Lagos-based financial advisory firm, Financial Derivatives, said of the surprise rate cut.
“However, lending has become price elastic, so no matter where the rates are, if the appetite is not there, nothing changes,” Rewane added, implying that the rate cut may have little impact on the economy.
“The MPR rate has stopped being an anchor for a long time, so the impact on financial instruments will be muted,” Rewane said. “Equity prices may rise, however, as investors see this as a signal that monetary policy is becoming pro-cyclical, unlike in the past when it was counterproductive.”
Announcing the new policy, Emefiele said the decision was a signal that the monetary policy needed to begin to consolidate growth, even though it does not in any way indicate a commencement of a rate-cutting cycle.
Nigeria emerged from its first recession in 25 years in 2017 with 0.8 percent growth thanks to higher oil prices.
The economy soon followed that up with growth of 1.93 percent in 2018, according to state data agency, the National Bureau of Statistics (NBS). Population growth of around 2.6 percent per annum means that GDP per capita has been negative since 2016.
The nation holds much more dollars in its external reserves today ($43 billion as at March) compared to 2016 when it fell to as low as $25 billion on the back of lower oil prices and production disruptions from militant attacks.
Inflation has collapsed from as high as 18 percent to remain sticky at 11 percent this year, printing at 11.31 percent in February. The foreign exchange market, though with its challenges of multiple exchange rates, has also enjoyed better stability. The market rate has largely hovered around N360-363 per US dollar since late 2017 while the CBN rate mod N306/$ has not budged. The stability in the fx market owes much to the CBN’s interventions.
Analysts say the fact that Nigeria’s fixed-income market has attracted billions of dollars in the past month, thanks to an improved appetite for emerging-markets assets, gave the CBN the confidence it needed to ease policy.
“We will continue to do what we have done in the past, by keeping inflation and exchange rate stable,” Emefiele said Tuesday.
According to Standard Chartered’s Khan, with the CRR – a much more important determinant of the policy stance of the CBN – still unchanged, it is not clear that a modest policy rate cut on its own will do very much to boost bank lending.
“Much more detail will be required on both fiscal and monetary policy intentions in the months ahead. It is not clear how much a 50 bps MPR cut really delivers in terms of growth,” Khan added.
Emefiele said Nigeria should be able to push growth to between 2.7 and 3 percent, up from 1.9 percent last year, if monetary policy complements expansionary fiscal policies.
“It is time to press a reset button for monetary and fiscal policies and devise a new set of policies if we must grow the economy above 2 percent,” said Tilewa Adebajo, CEO of CFG Advisory.
LOLADE AKINMURELE, HOPE MOSES-ASHIKE & MICHAEL ANI
