Why MPC Retained All Monetary Policy Rates

File Photo: Central Bank of Nigeria’s (CBN) Governor, Godwin Emefiele

The Monetary Policy Committee of the Central Bank of Nigeria last week made the choice of standing still having found itself between the devil and the deep blue sea. For the 13th time, it had left monetary policy unchanged as inflation rose slightly for the first time since January last year.

Of the 10 members that voted seven were in favor of keeping rates unchanged at 14 per cent, while three members voted in favor of a hike in the benchmark interest rate by 150 basis points indicating a growing hawkish sentiment. The MPC members had put into considerations the weak GDP growth numbers, the reversal in the inflation trend, depletion in external reserves, relative stability in exchange rate and growing foreign portfolio outflows.

Chief Executive of Financial Derivatives Company, Bismarck Rewane noted that MPC was confronted by a policy dilemma of either raising rates to stem rising foreign portfolio outflows, whilst moderating the threat of inflation or maintaining status quo in the face of weaker GDP growth numbers.

“The threat of external imbalances took precedence over domestic stimulation of the economy and left the committee with the realistic policy options of either tightening or maintaining status quo. In the end, the decision to hold all policy parameters was premised on the need to get more clarity on the timing and quantum of anticipated liquidity injections into the economy from pre-election spending and increased FAAC disbursements from higher oil receipts” he said.

as the United States Federal Reserve further raised its interest rate last week, analysts say this may furthere encourage capital outflows from the country. The US Federal Reserve on Thursday increased range to 2.00 – 2.25 per cents from 1.75 – 2.00 per cents while also signaling the likelihood of an additional hike before the end of the year; three increases in 2019 and one in 2020. Members of the FOMC said the hike in the policy rate was predicated on sustained strong economic growth and job gains.

Rewane noted that the increase in US Fed rates will increase the interest rate differential in the US and trigger increased capital flow reversal from emerging market economies including Nigeria. “We expect the impact to weigh immensely on the committee’s decision at the next meeting.”

According to Research Analyst at FXTM, Lukman Otunuga, higher interests in the United States have accelerated capital outflows and led to a drop in external reserves while global trade tensions continue to weigh on sentiment.

“Rising consumer prices amid pre-election spending remain another headache for the CBN, while political uncertainties add to the equation of components complicating any efforts to cut interest rates. With crude oil price volatility from US-China trade tensions presenting a significant threat to Nigeria’s economic recovery, the CBN could maintain the status quo for the rest of 2018.

“While a rate cut was initially seen as a strategy to support economic growth in Nigeria, such a move may end up widening the divergence in monetary policy between the Fed and CBN – ultimately accelerating capital outflows” Otunuga stated.

Analysts however postulate that the hawkish stance of the MPC might be further strengthened at its next meeting with the number of members voting for rate hike increasing. The IMF in its article IV consultation earlier in the year recommended a further tightening of monetary policy with the objective of achieving a single digit inflation target. Recent developments like the continuous depletion of the external reserves and the reversal in the inflationary trend, if sustained, make this a real possibility at the next meeting.

It is general consensus that increased money supply will exert some inflationary pressures in the short term, especially if output remains constant. This is on the back of election spending, which is poised to increase money in circulation and the impact of a likely increase in the minimum wage. However, the CBN might intervene using monetary instruments to mop up excess liquidity and maintain price stability. We believe the MPC will weigh the growth potential of the Nigerian economy against the weak GDP growth numbers. This is also likely to strengthen the resolve of policy makers to stimulate growth and recovery.

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