Hands tied behind its back: CBN’s MPC sees challenges weigh on loosening rates

By Charles Abuede

Challenges include:

• Skyrocketing inflation
• Pressure on FX and exchange rate
• Government revenue pressure
• Sluggish economic growth, outlook
• Protest, riot fatigue
• Weakened Fixed Income Market
• All questioning potency of policy rate

The CBN Monetary Policy Committee (MPC) is scheduled to hold its final meeting of the year on Monday 23rd and Tuesday 24th of November 2020, facing a myriad of challenges such as the surging inflation numbers, the streak of pressures at the foreign exchange window, recent nation-wide civil unrest, alongside several other factors that constrain an economic recovery. The progress recorded and key developments in the global and domestic space, as well as the outlook for the rest of the year, will be assessed to determine policy directions for key monetary variables in the near term.

Meanwhile, at the last reunion, the team expressed concern over the slowdown in the domestic economy, stemming from significant headwinds closely linked to the decline in oil revenue, the spates of upward pressures on price levels, alongside the revised exchange rate, hence its decision to stimulate growth through the monetary policy rate (MPR) reduction.

This may quash the exploit achieved in credit growth to the real sector. A loosening stance, however, should further stimulate output growth, stem the surging unemployment, and ease monetary conditions in the economy. Although, the macroeconomic atmosphere remains severely battered by fundamental factors, further exacerbated by the COVID-19 disruptions, it is believed that the Committee will maintain its intent of driving growth. Moreover, the Committee may also allow time in order to assess the impact of the previous rate cut on stimulating growth in the economy.

On the other hand, given the decisions of the CBN’s monetary policy committee to cut policy rates at different meetings this year on the back of covid-19 related disruptions and economic uncertainties, which are beclouding the monetary space in Nigeria, the Committee’s resolution is expected to be influenced by the third-quarter GDP report, as well as the pockets of steps forward made in the real sector, evidenced by November’s Purchasing Managers’ Index (PMI) figure of 50.2 points, amongst a host of other developments in the economy.

Economic analysts have, however, opined that the Committee could weigh the option of either hiking, loosening, or maintaining the status quo; while policy tightening may curb inflationary pressures, increase capital flows, and strengthen external reserves; also, it may dampen the progress made by real sector players towards accessible credit and may further weaken growth prospects.

According to one consensus Business A.M. was able to tease out from some economic analysts: “The CBN cut its benchmark rate to 11.5 per cent in September. In the next MPC meeting, it is expected that the MPC keeps the rates on hold as they would want to still further observe the impact of the September rate cut on the economy. Though, the capital market may continue its bullish run as investors flee the already weakened fixed income markets to take positions in stocks as their search continues to profiteering.”

The economic and financial analyst, 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 note to Business A.M. on the subject is of the view that maintaining the status quo at this November convention may strike a balance between the duty to rein-in inflation and the need to support growth.

“The MPC is likely to maintain status-quo during the November meeting expected to be the last for this year. Doing so will be striking the right balance between the duty to rein-in rising inflation and the need to support economic recovery. Tightening monetary policy via an increase in the policy rates will help bring down inflation and also strengthen the value of the naira through reduced pressure in the forex market and a possible increase in foreign investments. But toeing this path will hurt economic recovery via reduced credit to the real sector,” the economic and capital market expert stated.

“On the other hand, further relaxation of monetary policy via rates cut will aid the struggling economy with a salutary impact on the stock market. But, it is at the risk of worsening inflation and exchange rates. So, I expect the MPC to balance these considerations,” Uwaleke concluded.

Bamidele Samuel Adesoji, another economic expert and a senior analyst, in consonance with Uwaleke, posits that there is a high probability that the status quo will be maintained by the committee.

“MPC will hold rates this period; they have altered the policy and asymmetric corridors in the last meeting, so it will give it some time, say the end of the first three months in 2021. Meanwhile, if the monetary policy rate (MPR) is still potent, loosening rates will only do more damage to inflation anyways,” Adesoji said.

Furthermore, the unsavory recipe of border closures, covid-19 related disruptions and lower interest rates have fuelled inflationary pressures in Nigeria with consumer prices jumping to 14.23 per cent in October, making it the highest rate since February 2018. With inflation projected to rise above 14.5 per cent by the close of the year amid ongoing border closures, the policy committee might be given little or no room to loosen policy in a bid to curtail inflation.

According to Adesoji, who takes a position in the view that inflation could be curtailed with a loosened policy rate in the economy, said only if the policy rate maintains its potency to thwart the element of skyrocketing inflation.

According to the research analyst, “Currently, inflation doesn’t look like a monetary policy thing, it’s basically structural, seasonality, demand-pull and supply chain disruptions. Banditry is disrupting farmers in the north, and with ransom being paid to get items out. Of course, the closed borders continue to have its ripple effects,” he said.

On the other hand, some analysts, have also asserted that the apex bank has somewhat abandoned its role as a key stabilizer of the price level in the economy. Part of the reason is that the apex bank is faced with the choice of price stability or reflating an already bastardised economic growth. They opted for the latter. Inflation is more or less driven by structural defects.

To curtail inflation, in the short-run, CBN should look at rein in on the escalating food prices by relaxing its obnoxious foreign exchange restriction policies for the importation of key agricultural products. Meanwhile, opening the border will also help to rein in on the spiralling inflation.

Uwaleke, who shares a similar view, opined that: “Unlike other Central Banks, the MPC of the CBN cannot afford to loosen monetary policy at this time in a bid to support growth. Rather, I expect the committee to advise the CBN to continue to use unconventional measures such as the LDR and various interventions to support economic growth without compromising its primary mandate of price stability.

According to the professor, “I have no doubt that the MPC will have some pieces of advice for the federal government, especially in the area of tackling insecurity in the country, which has affected food production and led to rising inflation given that much of the inflationary pressure, according to the NBS, has come from the food component.

“Against this backdrop, I expect that the MPC will maintain the status quo and hold all the policy parameters,” he stated.

In addition, Lukman Otunuga, senior research analyst at FXTM, in a commentary to Business A.M., further revealed that: “In a perfect world, the government may have deployed tight fiscal policy to tame inflationary pressures. However, such a move that involves raising taxes and limiting government spending may do more damage than good at a time where Nigeria continues to heal wounds inflicted by COVID-19. With inflation projected to rise amid ongoing border closures, the Central Bank of Nigeria may have limited room to loosen monetary policy.”