The voting pattern which emerged at the Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN) at the weekend shows the extent of the apex bank’s sensitivity to external pressures in its price and exchange rate stability management, moving forward, analysts said at the weekend.
The implication of this, analysts say, is that given the rising inflationary trend over the past six consecutive months, the CBN may be forced to hike the rates if the trend persists.
Six members voted to retain the current stance of policy, while five voted for an increase in the private sector cash reserve ratio (CRR) and one member for an asymmetric move.
“It tells us much about how the CBN is likely to be influenced if the current pressures that are only just starting to emerge actually worsen. These include weaker oil earnings (with both price and output contributing), global factors such as Fed policy normalisation and the influence on investors putting new money into Nigeria, and also – significantly –domestic liquidity pressures”, says Razia Khan, analyst with Standard Chatered Bank, London.
Commenting further in her note to BusinessDay, Khan said that although the Committee decided to keep all interest rates unchanged (asymmetric corridor retained around 12% MPC, 15% private sector CRR, 75% public sector CRR), she added that “for markets, the key detail will be in the unexpectedly hawkish stance.”
She said that although the sizeable AMCON maturities expected in October would likely be part-sterilised, through a payout in government securities; with current excessive liquidity levels, many MPC members are thinking ahead as to how they will manage these pressures, stressing that the preference seems to be for a further hike in the private sector CRR – and conditions will clearly need to be monitored.
Another analyst said at the weekend that the development portends healthy debate at the meetings, while urging analysts to be forthcoming with regards to the way they would want the CBN to go about its mandate of price and exchange rate stability.
However, the Committte observed that the huge banking sector liquidity is still inaccessible to the productive sector and its potential effects on inflation and exchange rate concerns is now threatening monetary policy.
“We would be looking at the opportunity for easing, but as at now, we have not seen that, and particularly as we approach the election, we are not seeing that.
We are hoping that maybe after the elections, situations will improve,” Godwin Emefiele, the CBN governor said after the MPC meeting in Abuja.
One of the CBN’s key concerns is that banks are holding large excess reserves averaging over N300 billion, even when there are ample opportunities for productive and profitable lending to the real sector of the economy.
The concern is further heightened by the reality of injecting an additional N866 billion into the system through the redemption of maturing AMCON bonds in October.
Emefiele said there are fears that given the apathy to lending, banks may be inclined more to placing these new funds in the apex bank’s Standing Deposit Facility (SDF) or using it to increase pressure on the exchange rate.
According to him, a better option for monetary policy would have been to further tighten money to tame inflation and surging liquidity coming from both the banking system and anticipated election spending, but was constrained due to the potential risk of such decision to real sector borrowing.
He observed that the restrictive stance of monetary policy so far has provided important defenses against structural liquidity in the banking system and also reaffirmed the willingness to play a key role in managing expectations around exchange rate and inflation vulnerabilities.
He assured that going forward, adequate consideration would be accorded the goal of reining-in banking system liquidity to safeguard the objective of price stability, which he said would include advising and appealing to the banks and we are using this opportunity to do so.
“The monetary policy committee thinks that because of the size of liquidity we see in the system today, the natural direction is to tighten more, but we feel that this is certainly not the best option at this point, primarily because increasing interest rate will hurt our people,” Emefiele explained.
At least, if we cannot reduce interest rates, we should just leave it stable, rather than taking it up.”
The governor expressed satisfaction with the relative stability in the economy, also noting future risks to come from a possibility of capital reversals as the Fed’s Quantitative Easing in the US finally ends in October, amidst dwindling oil output and declining oil prices, domestic security challenges and upward trending headline inflation.
Nigeria’s Headline inflation rose to 8.5 per cent in August, from 8.3 in July 2014. The mild but sustained underlying inflationary pressures were attributable mainly to food production and distribution challenges posed by the insurgency activities.
Emefiele said the apex bank is concerned that the insurgency was forcing a switching from domestic to imported food to meet domestic shortfall with huge impact on external reserves and underscored the need to expedite action to restore normalcy to the troubled region to sustain the tempo of growth.
Onyinye Nwacukwu & Hope Ashike