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MPC: As CBN Opts for Rate Retention in Support of Growth Recovery - THISDAY

NOVEMBER 29, 2021

Last week, Nigeria’s central bank kept its benchmark interest rate unchanged at 11.5% for a seventh straight time, an action which financial analysts said would consolidate the modest gains achieved in the area of economic stability as the new year beckons, reports Festus Akanbi

Before the meeting of the Central Bank of Nigeria’s Monetary Policy Committee last week, some bookmakers in the Nigerian financial market had placed bets, insisting that the committee was very much unlikely to change any of its rates.

The thinking among watchers of the nation’s economy was in tandem with the popular saying that no one changes a winning team/formula. And true to their permutations, the committee retained all the rates by the time the CBN Governor, Godwin Emefiele addressed the press after the two-day meeting in Abuja.

At the end of the meeting, the committee resolved to hold the monetary policy rate and all other policy parameters constant.

Maintaining the Status quo

Governor Godwin Emefiele said the decision to keep rates steady was unanimously supported by members of the Monetary Policy Committee (MPC). “MPC believes that the existing policy stance has supported growth recovery and should be allowed to continue for a little longer,” Emefiele said. Nigeria’s economic rebound, after a COVID-19-induced recession in 2020, was being driven by fiscal and monetary interventions, he said. However, the security situation in Nigeria was hampering business confidence and foreign investor sentiment, Emefiele said.

The decisions reached are as follows: the benchmark interest rate (MPR) retained at 11.50%; the asymmetric corridor remained at +100/-700 bps around the MPR; the cash reserve ratio retained at 27.50%, and the Liquidity Ratio retained at 30.00>#/p###

In deliberating its decision, the Committee noted that inflation has continued to decline, and the economic recovery has seemingly gained traction in the second and third quarters. It stated that a rate hike would weigh on private-sector credit growth, and thus hinder the recovery. On the other hand, an easing of financial conditions could derail the downward path of inflation and exacerbate capital outflows amid more negative real interest rates. All in all, the Committee decided that there was no room to either tighten or loosen the Bank’s stance.

Period of Recovery

The Committee commended the continued recovery in output growth following the growth recorded in Q3-21. Accordingly, the Committee applauded the continued efforts of the fiscal and monetary authorities in supporting the recovery process despite persistent security challenges amidst inadequate infrastructure.

The Committee highlighted the continued moderation of the headline inflation in line with the slower pace of increases in food prices and the non-food basket. However, the Committee acknowledged that the inflation rate remains above the CBN’s target range of 6.0% – 9.0% and the MPR of 11.5%.

The CBN Governor noted that the committee was faced with whether to ease its accommodative stance, maintain the status quo or tighten to bring down inflation closer to the bank’s medium-term target of 6.0% – 9.0%.

The committee also felt loosening would lead to further widening in negative real returns and magnify price distortions in the financial market. As a result, the committee believed maintaining the status quo would allow gains from its accommodative monetary stance to continue to permeate the economy.

Market Expectations

In their reactions, analysts from Cordros Research explained that the decision of the committee to maintain the status quo on monetary policy parameters is in line with market expectations, pointing out that the underlying tone of the committee suggests the apex bank is bracing up for a change to a hawkish policy from Q2-22, a period that we think the committee will judge that substantial progress has been made in supporting economic recovery.

Justifying the vote to maintain the status quo, analysts from Cordros Research, in their response to the MPC meeting said, “We do not expect material deviations from the current dynamics of the FI market, considering that the MPR is increasingly becoming a signalling tool for market rates. We believe medium-term expectations on a hike in interest rates will continue to drive aversion for long-dated instruments. As a result, we believe bond investors are likely to maintain the strategy of playing at the short to the belly of the yield curve.

“With the attractive returns on fixed deposits and upside risks to inflation on the horizon, we expect investors to resist the DMO’s attempt to bring down rates at bond auctions to improve inflation-adjusted returns. Notwithstanding, we believe deliberate efforts by the DMO to reduce borrowing costs for the government will keep the yield curve below 14.0% levels.”

Responding to THISDAY inquiries on the outcome of this month’s MPC meeting, Executive Director, Cordros Capital Limited, Mr. Olufemi Ademola listed other considerations for the MPC’s decisions to have included the global economy, oil price dynamics, foreign exchange market, equities market, and fiscal sustainability.

He said, “At the end of the meeting of the Monetary Policy Committee of the Central Bank of Nigeria (CBN) which held on November 23rd, 2021, the committee voted unanimously to retain the benchmark interest rate (MPR) at 11.5%, whilst keeping all other monetary parameters constant. The MPC considered the growth of 4.03% real GDP and the consistent decline in headline inflation as the major reasons for retaining the monetary parameters.

“There are quite some other considerations that the MPC considered in making their decision, these include the global economy, oil price dynamics, foreign exchange market, equities market and fiscal sustainability among others.”

Monetary Expansion

Ademola believes that to stimulate the domestic economy in the face of declining inflation, there is a need for monetary expansion by lowering the monetary policy rate. “However, the instability in the foreign exchange market and the uncertain fiscal sustainability would require monetary tightening. The global economy is also experiencing significant uncertainties hence a wait-and-see approach appears the easier way to go,” Ademola stated.

Explaining further, the Cordros Capital Director, said that “It should be noted that the HOLD position is not an indication that all is well with the Nigerian economy. Rather, it is an attempt to adopt a wait-it-out approach to appraise the implications of the unfolding global development around policy tapering and normalisation by advanced economies on the one hand and distilling the diverse contributions of the existing monetary policy stance for a little longer to appraise its effects price stability and ultimately on economic growth sustainability.

“This is the last meeting of the MPC this year; hence except for any requirements for emergency intervention, there is no expectation of any major change in the direction of the economy until the end of 2021. While it is not likely to experience any exigencies that would require any drastic action from the monetary authority, an unexpected crash in oil price or foreign exchange crisis would require an emergency action of the Committee and the Central Bank.”

Fx Policy

However, some analysts faulted the MPC decisions because they didn’t give a clear-cut message on the direction of Nigeria’s foreign exchange market.

This was the position of Chief Economist and Head of Research, Middle East & Africa, Standard Chartered Bank, Razia Khan in an interview with THISDAY.

According to the London-based international economist, “Markets are likely to have been disappointed by the lack of mention of FX policy.”

She believes that “Ahead of 2022, delivering a better functioning FX market will remain a key reform, on which the rest of Nigeria’s reform effort – accelerating growth, safeguarding fiscal space, addressing fuel subsidies and moving to cost-reflective power tariffs – are likely to rest,” adding that getting FX policy right remains key to allowing for an accelerated recovery in the Nigerian economy.

The CBN had given no explicit forward guidance on rate movements in its accompanying statement, but noted that “a hold stance will enable the continued permeation of current policy measures in supporting the recorded growth recovery and macroeconomic stability”. As such, the majority of panelists see the Bank holding the rate at 11.50% until year-end, although some pencil in a hike, before the beginning of a tightening path next year.

It is hoped that the current momentum would be improved upon in the first quarter of 2022 when attention will be shifted to political campaigns ahead of the 2023 elections.


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