Analysts downplay rates tweak as CBN’s MPC meets

By Charles Abuede

• With inflation knee on its neck‭, ‬MPC can’t breathe a rates cut
• Apex bank caught between pandemic and spiralling inflation‭, ‬despite recession

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will hold its first meeting for 2021 on Monday and Tuesday, during which it is expected to assess its existing guiding principles in line with recent developments in the international space and their implications for the domestic economy.

But many economic analysts who spoke to Business A.M. over the weekend for this story, have gone ahead of the committee to make a call on the possible outcome of the meeting, saying the key monetary policy parameters will be left unchanged. In other words, they expect the meeting to announce that Monetary Policy Rate (MPR) will be left at 11.50 per cent; the Asymmetric Corridor at +100/-700bps around the MPR; Cash Reserve Ratio (CRR) at 27.50 per cent; and Liquidity Ratio at 30 per cent.

In 2020, the central bank MPC, just like a few of its counterparts elsewhere in the world, maintained a dovish stance, choosing to stimulate economic growth, which it gave priority over inflation; and only taking a decision to cut rates at the best of opportunities, after considering several factors, chief of which was the bid to close the opened gap between MPR and market interest rates.

But this has been a MPC that has chosen to distance itself from most central banks in the world who, facing the heat of the coronavirus pandemic, have embraced a looser monetary policy stance, and lowering of interest rates. It would appear it had found itself encumbered for more than four years now, every time it went into the meeting, that it had no breathing space, as it faced the tough choice of striking a balance between supporting economic growth and curbing rising inflation.

The CBN itself has found inflation a tough nut to crack in the last six years with the figures, each time they roll out of the National Bureau of Statistics (NBS), stubbornly defying the apex bank’s desired target of taming it at single digit.

With Nigeria still battling surging cases of the Covid-19 pandemic on the domestic front, the heightened level of inflationary pressures which accelerated to a 3-year high to reach 15.75 per cent, the insecurity challenges all over the country, persistent strains on the foreign exchange market, and the downbeat of the purchasing managers’ index data from the central bank, amongst others, the apex bank will have to fight off its skin in the face of this dilemma on either to have policy rates changed or unchanged.

At the last gathering of the wise men and women that make up the MPC, the committee strongly mulled over its preferences of either hiking or maintaining the status quo. But in view of spiralling inflation, the committee felt the appropriate decision would be to tighten its current position, as this ought to stem inflationary pressures, but at the detriment of invigorating credit growth, particularly to the real sector. That said, its decision to hold its position came on the heels of the positive results of the apex bank’s heterodox policies, which should strengthen the macro-economic environment, and boost productivity across all sectors.

In addition, economic analysts believe the committee would further urge the government to diversify its revenue base in the face of oil revenue volatility, and lingering effects of the coronavirus pandemic. Additionally, the passage of the N13.6 trillion 2021 budget,  if implemented with verve should enhance growth in the economy, especially due to increased capital spending, that takes 30 per cent of the expenditure plan.

Analysts’ expectations from first 2021 MPC meeting

Uche Uwaleke, a professor of capital markets at Nasarawa State University, and a fellow of the Institute of Chartered Accountants of Nigeria (ICAN), told Business A.M. that he expects the policy committee to maintain the status quo, the very outcome of their last meeting.

“The balance of risk would dictate that the MPC holds all the policy rates in January. Doing so will allow the CBN some more time to monitor macroeconomic response to the present accommodative monetary policy stance before possibly making any adjustment in future meetings of the MPC. So, I expect the MPC to maintain the status quo this January. That is, MPR at 11.5 per cent, CRR at 27.5 per cent and Liquidity Ratio at 30 per cent.

“So, the challenge before the MPC will be to strike a balance between supporting economic growth and curbing rising inflation. While on the one hand, a rate cut is justified by the need for the CBN to support economic recovery efforts of the government. On the other hand, the need to stabilize the exchange rate, as well as, tackle the rising inflation favours tightening monetary policy,” he emphasized.

Similar to the opinion held by Uwaleke, Abiodun Keripe, managing director, Afrinvest Research, said the CBN is expected to further maintain the status from the last conclusions in November 2020.

In his words, he said: “It is the start of the year and it is too early for the MPC to change the policy rate. We are going through a tough time, coupled with the recession and recession, after which the latest data from the National Bureau of Statistics (NBS), Nigeria, portend that Q3 2020 saw Nigeria recorded a constriction in her GDP numbers which do not speak well of the recession.

“However, irrespective of the decision from the policy committee, which we envisaged to remain unchanged, the equities and fixed income market may likely not react majorly to the outcome due to the significant boost from the fixed income market to the equities market, as well as the FGN fiscal deficit in the tune of N5.1 trillion, fund which the DMO is canvassing through its FGN bond auction will be highly anticipated to bolster the illiquidity in the market,” he said.

In a related development, analysts at Greenwich Merchant Bank submit that the committee is faced with striking a balance between stimulating growth and putting inflationary pressures under control.

“A tightening stance may appear more appropriate to curb inflationary pressures, ensure capital flights are under control, reduce external liquidity shocks, and even attract foreign investors.  Still, high inflationary pressures, weak aggregate demand, shrinking job numbers, rising debt levels, and uncertainties clouding the FX environment continues to threaten the strength of the macroeconomic space.

“Our premise for a rate hold is based on two factors. Firstly, the burgeoning needs to stimulate economic activities and create jobs, in a bid to boost a quicker economic rebound. Secondly, the Federal Government’s need to foster a closer co-ordination of monetary and fiscal policies to accelerate growth in the country. In this manner, we expect the MPC would retain its current monetary policy stance. We opine that it might take a while for growth to return to its pre-pandemic levels, as domestic demand is set to remain weak. However, a low base effect and an anticipated pick-up in the non-oil sector underpin growth in the positive territory,” Greenwich analysts told Business A.M.

Given the decisions of the CBN monetary policy committee to slash policy rates at different assembly of the body last year on the back of coronavirus related disruptions and economic uncertainties which are beclouding the monetary space in Nigeria, the MPC is likely to shift focus back to price stability in 2021 as multiple objectives on the CBN’s table will undermine monetary policy effectiveness. However, change in interest rate policy and the introduction of special bills by the apex bank will serve as an additional tool for liquidity management which might signal an increase in interest rates.