MPC stuck with stubborn inflation, negative growth in rate decision Tuesday

Monetary Policy Committee (MPC) started its last meeting in the year on Monday and would announce the outcome on Tuesday (today) with most analysts in the financial services sector expecting no change in benchmark interest rate.

The Nigerian central bank is caught in the web of soaring commodity prices and negative economic growth causing the biggest headache, as it meets to determine the flow of credit in the economy.

Most analysts polled by BusinessDay expect a hold in the Monetary Policy Rate (MPR) following Nigeria’s submergence into the second recession as evidenced in the latest GDP report by the National Bureau of Statistics (NBS).

The Nigerian economy “officially” entered a recession after contracting 3.62 percent in the third quarter of this year, caused majorly by the impact of the coronavirus pandemic and a lack of reforms in fiscal policies to boost confidence and attract private investment in an economy that depends largely on oil sector to grow. In Q2, the economy shrank by 6 percent, its deepest cut in more than a decade.

But if it was just a recession alone, the policy mix would have been a lot easier. The economy is also confronted with stubborn inflation that accelerated to 14.23 percent in the month of October, its highest level in over 32 months, posing a serious economic challenge on investment and consumers’ shrinking income.

Nigeria recorded two consecutive quarters of negative growth as Gross Domestic Product (GDP) in real terms declined by -3.62% (year-on-year) in Q3 2020, from -6.10% recorded in the previous quarter (Q2 2020), according to the NBS.

“If a recession occurs in the third (Q3) 2020 the Committee would be confronted with proposing policy options in a period of stagflation,” Godwin Emefiele, governor, CBN, said after the last meeting in September.

This is because, with the recent removal of subsidy on fuel price, the increase in energy prices, and the adjustment of the exchange rate, inflationary pressure will no doubt persist unless MPC considers options that will deal with the pressure aggressively.

According to Olalekan Aworinde, senior lecturer, Department of Economics, Pan-Atlantic University, Lagos, the general expectation is that the MPC will be looking at how the economy will bounce back arising from the latest report of the NBS that the third quarter GDP nosedived by 3.26 percent.

“In an attempt to stimulate the economy and for the economy to move out of the recession, I think the MPC is more likely to keep the interest rate level constant or reduce the interest rate so that investors can have access to loanable funds.”

At its September 2020 meeting, the CBN cut its monetary policy rate by 100 basis points to 11.50%, marking the second cut so far this year and the lowest rate since February 2016.

The surprising rate cut in September was a majority vote of six to four. Three dissenters voted for an unchanged stance and the fourth for a 50bp reduction in the policy rate.

“This act has further support for our expectation that the Committee will leave its stance unchanged. Additionally, its favoured default position is wait-and-see to assess the impact of previous policy action(s). To restate our view after the release of the October inflation report, the MPC would have to perform some impressive gymnastics if it is to vote for another cut,” analysts at FBNQuest said.

On his part, Uche Uwaleke, professor of the capital market and president Capital Market Academics of Nigeria, said, “I don’t expect any shift in position. Yes, the economy is now in a recession but this was already known to the members of the MPC before the September meeting. The reduction in MPR at that time was meant to aid economic recovery. So, I don’t see a further reduction given the spike in inflation rate and a resurgence of pressure in the forex market.”

An increase in MPR to stem inflation is also not expected in view of the adverse consequence on economic recovery, he said. The MPC will end up advising the CBN to continue to use heterodox measures such as the loan-to-deposit ratio and various interventions to support growth.