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As MPC Meets, Growing The Economy Should Override Price Stability Objective - DAILY TRUST

JANUARY 25, 2022

All arrangements are set for the country’s Monetary Policy Committee (MPC) to meet for the first time in the New Year and of course the 140th session of the current ten-member team, as two seats remain vacant.

Throughout 2021, the MPC maintained the same policy, retaining the monetary policy rate (MPR) at 11.5 per cent, with an asymmetry corridor of +100/-700 basis points, implying the standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) of 12.5 per cent and 4.5 per cent, respectively.

Interestingly, banks continue to resent the impact of the elevated cash reserve requirement (CRR) on their profitability, as some banks noted the CBN actually sterilizes over 50% of their naira deposits from customers, far in excess of the official CRR set by the MPC.

Nonetheless, the CBN’s claim on banks’ cash has always been on the argument that it is a punitive measure aimed at stimulating banks’ appetite towards lending to the real sector; so the more you lend to businesses, the less your CRR, so says the apex bank!

At the 22nd and 23rd November 2021 meeting, all the ten members in attendance unanimously decided that maintaining the policy variables at the current level would enable the Committee to carefully appraise the implications of the unfolding global development around policy tapering and normalisation by advanced economies, as it acknowledged the early signals from the United States Federal Reserve Bank to start winding its accommodative policies.

Notably, inflation in the United States reached 7 per cent in December 2021, as the largest economy in the world saw the highest year-on-year rise in consumer goods prices in the past forty years.

The Office for National Statistics in the United Kingdom also reported an inflation rate of 5.4 per cent in December, the highest in thirty years.

Most major global markets are battling the menace of inflation, some attributable to the lagged impact of supply constraints occasioned by the protracted 25-month long COVID-19 pandemic.

Interestingly, Nigeria’s monetary policy committee is not unmindful of the vulnerability of the country to higher interest rates in the U.S., United Kingdom and other markets, especially as it also raised concerns on the resurging pandemic in China, a major trading partner, which is also struggling with power outages and recent crisis on its property market.

According to the MPC at its last meeting, the gradual normalisation of monetary policy in developed economies would dampen the recovery of several Emerging Markets and Developing Economies, including Nigeria, in the short to medium term due to the sharp reversal of capital flows.

Notably, the real interest rate has been negative in Nigeria for the past 27 months, as the inflation rate remains well above the interest rate, a phenomenon, which some analysts say partly discourages savings and investments in Naira-denominated assets. However, the argument against raising the interest rate has been that the inflation rate has been steadily easing, recording the eight consecutive month decline to 15.40 per cent in November 2021.

However, the MPC may be stuck between a rock and a hard surface now, as the December inflation showed a reversal in the trend, with headline inflation spiking to 15.63 per cent. Analysts think inflation may have reached its near-term trough and may trend higher, especially as Nigeria may have a fair share of imported inflation from rising prices of consumer goods in the global market, being a highly import-dependent country.

So, the question is whether or not the MPC would consider the vulnerability of Nigeria to the emerging rise in the global interest rate and rising domestic inflation or whether it would continue to favour growth over price stability, as it has shown in the past 13months.

Gauging market expectations, Abiola Rasaq, former Economist at United Bank for Africa Plc and current Head, Strategy and Execution at the Central Securities Depository, said: “The Committee would likely maintain a bias for growth over price stability, at least in the near term”.

He expects the Committee to retain the MPR at 11.5 per cent and rely on the CBN in using administrative measures to manage market liquidity and strengthen its development finance support to preferential sectors, such as agriculture, manufacturing and power, where the CBN has disbursed over N2trillion in the past two years.

According to him, at least the MPR still has “a signalling effect and influences investors’ asset allocation decisions”.

Also commenting, Lizzie Wali-Kings, Chief Executive Officer of Blackstone Capital, supported the MPC’s continued accommodative stance, noting that the Committee would further its support to the economy, as she strongly believes that lower financing cost is critical to achieving sustainable growth.

“Notwithstanding the resilient recovery of the economy, with 2021 third-quarter GDP growth printing at 4.03 per cent, the fourth consecutive positive growth since recovery from the pandemic induced recession, the country’s output is still well below potentials and there is need to stimulate credit flow to the economy,” she said.


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