Citing stretched monetary policy CBN leaves rates unchanged

The Central Bank of Nigeria (CBN) yesterday pushed back against political pressure from the finance ministry to loosen monetary policy, as it kept its benchmark monetary policy rate (MPR) unchanged at 14 percent on Tuesday.
All ten members of the Monetary Policy Committee (MPC), voted to maintain the status quo, according to Governor Godwin Emefiele, in a press briefing in Abuja, following the vote.
“Monetary policy has been stretched since 2009 and it alone cannot move the economy out of stagflation, caused by twin current account and fiscal deficits,” Emefiele said.
“The biggest challenges the economy faces are unsystematic and incomplete structural reforms which raise cost, risk and uncertainty.”
The MPC members also voted to retain the Cash Reserve Ratio (CRR) at 22.50 percent; the liquidity ratio at 30.00 percent; and the asymmetric window at +200 and – 500 basis points around the MPR.
Nigeria is going through its first recession in more than 20 years, brought on by low oil prices and inflation accelerated to an 11-year high of 17.6 percent in August.
Finance Minister, Kemi Adeosun, said on Monday that the CBN should lower interest rates so that the government can borrow cheaper domestically to boost the economy.
Higher rates represent tighter conditions, because they increase the burden on companies raising funds and consumers seeking loans for homes or other purchases.
Razia Khan, Africa chief economist at Standard Chartered, however says lowering interest rates would have failed to scratch the surface amid economic recession in Nigeria.
“In the current environment, lower interest rates will do nothing for growth. Nigeria needs FX and confidence in the naira. Amid weak growth, FX constrained environment, banks will be cautious about lending,” Khan said.
“While the MPC resisted giving in to political pressure to cut interest rates, and positive real market interest rates provide an important mitigant to the lack of further policy tightening, nonetheless, we expect markets to be disappointed with this outcome.”
Emefiele justified the hold position of the MPC saying the CBN had cut rates last November without getting the necessary uplift in credit growth to the private sector, while the liquidity surfeit the rate cut created had found an outlet in putting pressure on the exchange rate.
The CBN later reversed course by tightening in March, 2016 (CRR to 22.5%, MPR to 12 %), which put a dent on its credibility.
“Against this background, members re-emphasised the need to prioritise the use of monetary policy instruments in dealing essentially with stability issues around key prices (consumer prices and exchange rate) as prerequisites for growth,” Emefiele said.
Emefiele also mentioned that the month on month trend for inflation was down since May, 2016, while some $1 billion of inflows had come into Nigeria between July and August this year, following the new FX reforms.
“We expected a hike in the MPR by 100 basis points on the basis of attracting foreign flows which would assist in stabilising the new FX regime as sizeable autonomous inflows will supplement the CBN,” said Chinwe Egwim, a fixed income analyst at FBN Quest.
“The MPC preferred to adopt a wait and see approach, believing that the tightening of the last MPC meeting was sufficient,” Egwim said.
Bismarck Rewane, CEO of economics consultancy, Financial Derivatives Company (FDC) said leaving rates where they are was accommodative.
“The key thing to look out for now is the settlement of $1.6 billion in forwards due Friday, and resumption of some 240,000 barrels per day of shut in Qua Iboe oil exports,” Rewane said.
Maintaining the status quo was a good thing that confirms the consistency and credibility of the Central Bank, according to Ike Chioke, MD of investment firm, Afrinvest.
Tajudeen Ibrahim, head of research at Chapel Hill Denham Limited, says the decision sends a positive signal, considering that the committee could have raised rates in response to inflation pressure.
“We could begin to see moderation in short term interest rates, particularly T-bills, and a fair stability in long term interest rates, which is better than a spike. This should result in relatively stable long term borrowing rates for the government,” said Ibrahim.