MPC: Is Change In Monetary Policy Rates Too Soon?

By Nse Anthony-Uko

Expectations are high about the possible outcome of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) which begins its two-day meeting on Monday.
However, analysts say that a change in the monetary policy rates would too soon even though both inflation Rate and foreign exchange rate have shown some improvement since the last meeting in January.
According to them, more time is required before a monetary policy change can be effective under the circumstances.
At the January 2017 meeting, the MPC maintained the monetary policy rate at 14 per cent, with asymmetric corridor of +200 basis points and -500 basis points (meaning that banks can borrow from the CBN 16 per cent and keep money with the CBN at 9.0 per cent). The cash reserve requirement and liquidity ratio were also retained at 22.5 per cent and 30 per cent respectively.

The CBN’s deliberation will focus on the variables below among others:
Inflation
Figures released by the National Bureau of Statistics (NBS) showed that inflation slowed to 17.8 per cent year-on-year (y-o-y) in February from 18.7 per cent y-o-y in January. February marked the first time in 15 months that y-o-y inflation slowed from one month to the next. The moderation in headline inflation was largely driven by lower energy and utility price inflation. The sub-indices measuring household utilities and transport both weakened sharply. Food price inflation, on the other hand, jumped from 17.8 per cent y-o-y to an eight-year high of 18.5 per cent.


External Reserves
Nigeria’s foreign currency reserves continued to head higher in the period since the last MPC meeting on January 23rd. At $30.19 billion on March 13th, the country’s stock of foreign currency reserves has increased by $4.196 billion or 15.7 per cent, relative to the $26.09 billion at the beginning of the year.
The sustained accretion in the reserves has coincided with relatively higher oil prices and improving domestic crude oil production. Bonny light, Nigeria’s reference crude, closed at $50.05 per barrel on March 15th, lower than $54.87 per barrel on January 23rd.
According to the Nigerian National petroleum Corporation (NNPC) Nigeria’s oil production stood at 2.1 million barrels per day as of February.

Exchange Rate
The naira strengthened in the parallel market to N457/$ on March 15th from a low of N520/$ recorded in mid-February. The naira’s new-found strength in the parallel market can be attributed to the CBN’s adjustments to its forex policy. On 20th February, the monetary regulator announced it will provide additional funding to banks to meet the needs of Nigerians for personal and business travel, medical expenses and school fees – settled at a rate not exceeding 20 per cent above the interbank market rate. At the interbank market, the local unit remained fairly stable, quoted at N306/$ on March 15th compared to N305.5/$ in January.
Money Market Rates
Overnight (ON) and Open Buy Back (OBB) interbank rates dropped to 13.42 per cent and 12.50 per cent in that order on March 15th from recent peaks of 132 per cent and 128.33 per cent respectively attained in February.
According to traders, the higher interbank money market rates recorded in February came as commercial lenders provided funds for several currency sales via interventions from the CBN. Longer dated instruments such as the 90-day NIBOR however reflected a far less volatile course, closing at an average of 19.78 per cent on March 15 th from 18.63 per cent in January.

Gross Domestic Product
The release of Q4-2016 GDP by the National Bureau of Statistics (NBS) confirmed the full-year contraction of the Nigerian economy, with real GDP down -1.5 per cent year-on-year (y-o-y) in 2016. The GDP outturn was the first full-year contraction since 1991. Fourth-quarter national output shrank by -1.3 per cent, a notable improvement from the previous quarter’s sharp -2.24 per cent drop.

Output by the oil sector in 2016 contracted -13.85 per cent from a year earlier, and declined -12.4 per cent in the fourth quarter from the same period in 2015.
Oil production averaged 1.9 million barrels a day in the fourth quarter compared with 1.6 million barrels a day in the third. The non-oil sector contracted by – 0.3 per cent in the fourth quarter, and by -0.2% for all of 2016. A decline in real estate (-9.27 per cent), manufacturing (-2.54 per cent), construction (-6.03 per cent) and trade (-1.44 per cent) weighed most on the non-oil sector in the fourth quarter.


Considering the slow down in February inflation rate at 17.8 per cent, the first in 15 months, a cutback in benchmark interest rate would seem appropriate. However, this may not likely be as analysts are unanimous in their call for the MPC to maintain status quo.

According to analysts at Access Bank, FSDH Merchant Bank, Afrinvest West Africa and Cowry Assets Management, easing monetary policy will see an increase in inflation.
According to analysts at Afrinvest, dovish stance by way of rate cut or reduction of Cash Reserve Requirement (CRR) may not only “fuel further monetary induced inflationary pressures while toeing the line of the fiscal managers may also discredit foreign capital attraction into the country especially given the recent United States Fed Fund rate hike.”
“Similarly, a rate cut could dampen CBN’s efforts in squeezing excess liquidity from the system which could hamper the stability of the Foreign Exchange market. On the flipside, a hike in rate may also be sub-optimal at this time as this may further squeeze out liquidity from the banking system as banks may deploy funds towards investment securities while also constraining growth potentials, thus worsening the economic conditions.”
Also, analysts at FSDH say a change in monetary policy might be too soon as more time is needed before a change in policy can be effective in the economy that is working towards recovery.
Also, analysts at FSDH say a change in monetary policy might be too soon as more time is needed before a change in policy can be effective in the economy that is working towards recovery.
Analysts at Access Bank expects that the deceleration in inflation and slower rate of decline in GDP growth, make it very likely that the CBN will take a neutral stance with respect to the benchmark interest rate. “Recent Communiqués by the MPC have implied that fiscal, rather than monetary expansion would be required to boost growth. The recent release of the Economic Recovery and Growth Plan (ERGP) signals that robust fiscal policy to complement monetary policy is underway,” the said in an emailed report.
Meanwhile, investors’ appetite is expected to remain tilted towards shorter term government securities at the fixed income market given the high yield offering which tends to off-set current inflation risk and also inflation expectation. At the last bond auction held by the Debt Management Office, bond yields hovered at around 16.2 per cent.

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