Reality check leaves MPC with accommodative policy stance

As economic analysts and investors take positions for the second half of the year, the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) will meet again for the fourth time this year to consider various indicators aiding and impeding growth in the Nigerian economy.

But a myriad of factors, presently and in the future, are likely to drive the trajectory of the Nigerian economy, as well as shape the outcome of the 280th MPC meeting, which will not fail to consider developments around Covid-19 infections and vaccination, if economic growth garners pace, the success of federal government’s external debt issuance plans, the ability of the government to finance its budgetary obligations with stronger foreign reserves and consequently, the exchange rate.

However, as various economic analysts who shared their sentiments with Business a.m. have noted, the monetary policy rates decision from the MPC at these meetings would be a key factor to keenly watch in the search for guidance in this second half of the year.

There is some sort of consensus about a muted outcome on the basis that the persistent disinflation of the last three to four months  supports a wait-and-see stance, especially given the fragile state of economic recovery. And this may no longer be a surprise to analysts following concerns on current twists in the nation’s economy and the need for the committee to thread on the delicate path of pro-growth and anti-inflationary policies.

MPC’s pro-growth route amid other factors

Over the years, the central bank, like its counterparts in other jurisdictions, especially in the West, has pursued a pro-growth objective that has continued to drive increased money supply and escalate near term inflation rate. A major talking point remains the path to recovery and in the long-run achieve growth, but the stance to tighten or hold policy rates hangs in the balance given the fragile state of the Nigerian economy.

The major factor that has remained a concern for monetary policy is persistently high inflation, which is way above the CBN’s target band of 6-9 per cent. Now, the consumer price inflation is on a u-turn as disinflation has set in, forcing its way into a key factor to consider in reaching a decision.

Last year, the CBN’s policy committee was dovish, tweaking the policy rates at two of its six meetings (having a lower monetary policy rate) in a bid to stimulate economic growth in the face of the coronavirus pandemic, which had crippled economic activities globally and crushed several economies. The downward reviews by the MPC, however, did not really impact the credit space, especially for small businesses, as few of these business owners have access to traditional banking loans.

At its May 2021 meeting, the MPC recognised stagflation and the simultaneous contraction of output as problems confronting the Nigerian economy. It recognised that the strategies put in place to rein in inflation through the use of a series of administrative measures by the CBN to control money supply through liquidity mop up in the banking industry had started to yield results.

The committee also noted that economic growth could be hampered in an environment of unstable prices. To this end, the choice, therefore, was one of loosening the policy stance to ease credit further; or tighten to moderate price development; or maintain a hold stance in order to allow previous policy measures to continue to permeate the economy, while observing global and domestic developments.

Eventually, the MPC made the decision to hold all policy parameters constant after considering that an expansionary stance of policy could transmit to reduced pricing of the loan portfolios of Deposit Money Banks and result, therefore, in cheaper credit to the real sector of the economy, while a contractionary stance would only address the monetary component of price development, while supply-side constraints such as the security crisis and infrastructural deficits can only be addressed by policies outside the purview of the central bank, and a tight stance in the view of members will also hamper the CBN’s objectives of providing low-cost credit to households, Micro Small and Medium Enterprises (MSMEs), Agriculture, and other output growth and employment stimulating sectors of the economy.

On the flip side, there is a growing thought among analysts that the MPC 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 fails to notice the focus of the CBN on improving access to credit at affordable rates to help push the Nigerian economy onto a growth road.

Meanwhile, it is without a doubt that the apex bank will focus on two indicators when it comes to interest rate setting: Weighing the economic growth against price stability and the position of foreign investors in the Nigerian currency which, in the street market, has lost grounds and trading above N500 to a dollar, while at the official NAFEX window it is trading between N410 and N418 to the greenback.

Analysts’ can’t see CBN’s rates tweak surprises

Examining the views of some analysts, it appears the MPC is stuck between two choices, maintaining exchange rate and price stability and reflating the already weak economic growth. Over the past months, we have seen the CBN switch its monetary policy from exchange rate targeting to development financing and reducing the cost of borrowing to increase economic growth.

Uche Uwaleke, a professor of capital markets at the Nasarawa State University, and also a fellow of the Institute of Chartered Accountants of Nigeria (ICAN), in a commentary note to Business a.m. said as a result of spiralling inflation, the policy committee may be arm-twisted into changing its policy stance in a bid to rein-in on inflation and also stabilise the exchange rate.

“The passage of the Petroleum Industry Bill and consent of the National Economic Council for full deregulation of the downstream petroleum sector; fiscal surprises expected from the increase in FAAC distribution on account of naira devaluation and strong revenues, especially from Petroleum Income Tax, will all combine to influence inflation trajectory in the months to come. Other factors include the approval of a supplementary budget of nearly N1 trillion by the National Assembly, chiefly for defence spending; the increase in government borrowing threshold by the DMO from 25 percent to 40 percent in relation to Debt to GDP, as well as the fast depletion in foreign reserves and its consequences for exchange rates stability.

“Against this backdrop, the MPC of the CBN will likely hold rates again this month, perhaps for the last time this year. With rising inflation and increasing pressure in the forex market, the CBN may be arm-twisted into changing the current accommodative monetary policy stance to rein-in inflation and stabilise Exchange rates. This may be accompanied by another upward adjustment in the Exchange rate (naira devaluation) in pursuit of rates unification. This change in policy stance may happen as early as September or in November 2021 during the last scheduled meeting of the Monetary Policy Committee,” Uwaleke concluded.

The Economist Intelligence Unit (EIU) in their recent country report on Nigeria, opined that “The CBN will fail to keep inflation below a target ceiling of 9 percent, and its policy decisions are likely to remain erratic. Since a 100-basis-point cut to 11.5 percent in 2020, the policy rate has been kept steady. Inflation is high year on year, at 17.9 percent in May [17,75 percent in June], but the rate has edged down from a decadal high in March. The current strategy is to boost the supply side of the economy and thereby control inflation.

“We believe that this is misguided; high inflation will frustrate an economic recovery, and issues such as inadequate public infrastructure, hard-currency shortages and rampant instability need to be addressed before the supply side can substantially contribute to moderating the price level. Enduring high inflation is expected to compel the CBN to raise interest rates in 2022 as the economy becomes more resilient. Monetary easing will resume only in 2024 when inflation has fallen appreciably,” they noted.

Meanwhile, analysts at United Capital Research hold the opinion that “the probability of a rate hike at the Monetary Policy Committee (MPC) meeting is muted as the persistent disinflation supports a wait-and-see stance, especially given the fragile state of economic recovery.”