Hold rates! Analysts unwavering amid disinflation as MPC meets

By Charles Abuede

• Expect MPC to hold all parameters
• MPC to thread delicate path of pro-growth policies

The outcome of the gathering of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC), which takes place on Monday and Tuesday this week is not particularly expected to present any surprises to economic analysts, especially in the face of concerns over the current twists and turns in the nation’s economy and the need for the committee to thread the delicate path of pro-growth and anti-inflationary policies.

The MPC will be meeting for the 279th time amid several economic realities bedevilling the Nigerian economy.

It is no news that Africa’s largest economy confronts, in the face of the lingering coronavirus pandemic, the bane of insecurity in the north-east and north-west regions of the country, the continued pressure on the domestic currency, the naira, in the currency market, resulting from the incessant demand for foreign-denominated currencies, and the insalubrious rate of the rising consumer price index, a measure of the inflation that holds tight at her jugular, among other issues.

At the start of last week, the National Bureau of Statistics (NBS), in releasing its April 2021 inflation report, stated that Nigeria’s headline inflation took a sudden reversal, printing at 18.12 per cent year-on-year for the first time after nineteen months of its northward movement. Similarly, food inflation, which has always been a key driver of the headline numbers, also fell unexpectedly from 22.95 per cent year-on-year to 22.72 per cent, while the non-food inflation numbers picked up growth to 12.74 per cent from 12.67 per cent in the previous month. However, food inflation has continued to be the key driver with the highest increases in the index coming from fish, meat, oils and fats, tubers, bread, cereals, potatoes, eggs and vegetables.

For more than six years the apex bank has taken a conscious pro-growth stance that has continued to drive increased money supply, escalating near term inflation rate. Although, a major talking point has been the path to recovery, and in the long-run, achieving growth while the stance to tighten policy rates or hold same, continues to hang in the balance given the fragile state of the Nigerian economy. The major factor that has remained a concern for monetary policy has, therefore, been the persistently high inflation.

In the year 2020, the CBN’s policy committee, took a dovish position by tweaking the policy rates at two of its six meetings (having a lower monetary policy rate) as a stimulus package in a bid to stimulate economic growth in the face of a pandemic that had crippled activities and crushed several economies around the world. 

The downward review by the MPC, however, though lauded by analysts, did nothing to impact the credit space for small business holders, especially as few of them have traditional banking loans. 

In an economic analyst’s view, the MPC is stuck between maintaining exchange rate and keeping prices stable and reflating an already weak economic growth. Over the past many months, we have seen the CBN switch its monetary policy from exchange rate targeting to development financing, and then reducing the cost of borrowing to increase economic growth so as to create jobs and rein in spiralling inflation.

It can also be recalled that the committee, the last time out, accepted that the steep rise in inflation is due largely to structural and supply-side factors, rather than demand considerations. Most, but not all members, made this point strongly. The logical response, one member argues, would be for the federal government to tackle the insecurity in food growing areas and inadequacies in transport and logistics.

Analysts see no room for rate tweak by MPC

A number of analysts who have offered their views on the foregoing assert that given inflation, a cut in the policy rate seems unlikely. In the context of fragile growth, the monetary policy committee might retain the 11.5 per cent MPR while allowing market interest rates to climb further. There is only a slim chance of the MPC raising the MPR. Some analysts told Business A.M. that the expectation is nothing different from the previous position the committee had taken at its meetings; they expect it to hold all rates steady.

The position that the MPC will maintain its stance on key monetary policy rates is borne out of the fact that there are usually lags between when policies are taken and when its impact begins to materialise. However, CBN could still be monitoring the impact of its rate cut last year on key economic variables like inflation and gross domestic product (GDP). While the first quarter of 2021 GDP report is yet to be released to substantiate the impact the last rate cut had on growth, inflation on the other hand has surprisingly slowed in April, but this alone may not be enough to justify a move to either increase or decrease key policy rates as there still exist structural factors that could further stoke inflation, especially food prices.

Garba Kurfi, managing director of APT Securities and Funds Limited, told Business A.M.: “I do not expect any change. The policy committee may probably retain the policy rates as a way to watch what happens in the near term. The other area that needs to be addressed is the FX segment which already, the apex bank has addressed by maintaining the N5 that’s given for a dollar in the CBN’s ‘Naira 4 Dollar Scheme”, and removing the official exchange rate from its website.

“The driver of MPC issues come Monday and Tuesday at the deliberations, will be inflation; but luckily, it has started coming down and improving the Treasury Bills rate and FGN Bonds, which are likely to stabilise at the current rate,” Kurfi said.

Kalu Aja, an economic expert and financial planner, who shares similar views as Kurfi, told Business A.M. that he is optimistic of an unchanged rate stance by the committee because the unexpected disinflation, which was reported in April 2021, will not drive the decision by CBN to tweak rates.

“That reduction of inflation was very narrow, in my view, to prompt a reversal of monetary policy. CBN is wary of inflation as it affects exchange rates. So, I don’t see them dropping rates to boost money supply when demand for the dollar is still unmet. I think they may maintain stance,” the financial planner said.

In the meantime, a thought is growing in part of the analysts’ communities that Business A.M. interacts with, that the monetary policy committee will slip back to an “orthodox” monetary policy stance this year by tightening as a response to the inflation trends. However, the view is trending in non-Nigerian institutions and it appears to fail to notice the focus of the CBN on improving access to credit at affordable rates to help push the Nigerian economy into a growth path and away from recession.

In the meantime, it is without a doubt that the bank will focus on 2 indicators when it comes to interest rates setting: weighing economic growth against price stability and also the position of foreign investors on its currency.