Post-MPC meeting: Analysts predict CBN may apply unconventional tools to tweak rate

By Charles Abuede

Now that the much-anticipated January MPC meeting, which outcomes left analysts and investors unsurprised, has come and gone, what happens to the Nigerian economy, businesses and interest rates? The committee voted unanimously, on Tuesday, to grip its policy rate at 11.50 per cent and left its other parameters constant, just as predicted by virtually all the economic analysts Business A.M. spoke to for its front page story of the last edition, which made this newspaper call the meeting a ‘rates hold’ meeting.

The MPC noted, with apprehension, the spike in headline inflation, now at 15.75 per cent, and well above the Central Bank of Nigeria’s 6-9 per cent target, which linked to well-known legacy issues, as well as rises in the retail price of petrol and electricity tariff. In its communiqué, the MPC argued that inflationary pressures will moderate as growth in output springs back, supported by the monetary and fiscal stimulus on offer.

While central banks across the world have embraced looser monetary policy to defend their respective economies against the effects of Covid-19, the CBN simply does not have enough breathing room, it has turned out over the last three to four meeting circle. Given how inflation remains well above the 6-9 per cent target, “a rate cut could fuel inflationary pressures which can ultimately impact Nigeria’s economic growth,” said the committee.

In the broad view of some analysts well versed on the matter who spoke to Business A.M. after Tuesday’s meeting: “It is no surprise that the Central Bank of Nigeria (CBN) has left interest rates unchanged at 11.5 per cent.”

Lukman Otunuga, senior research analyst at FXTM, in a note to Business A.M., said the CBN may end up enforcing unconventional tools in an attempt to revive growth should the growth outlook deteriorate due to Covid-19. These include tweaking the loan to deposit ratio (LDR), liquidity ratio (LR), and cash reserve ratio (CRR).

“But this is where things get tricky. Activity in Africa’s largest economy has displayed signs of improvement thanks to the easing [of] lockdown restrictions and rising oil prices. However, the second wave of infections and ongoing uncertainty over the vaccine rollout threatens to sabotage any meaningful recovery. With the coronavirus pandemic already derailing the CBN from its price stability mandate, the bank is likely to adopt a wait-and-see approach for the foreseeable future,” Otunuga wrote.

Directing attention to the MPC meeting outcome, he recognised that committee once again expressed concern about rising inflation, and went on to state that, “indeed, inflation is expected to remain elevated due to supply disruptions created by Covid-19, tightening border restrictions, the increase in VAT, and removal of fuel subsidy. With the trajectory on inflation pointing north, interest rates are unlikely to move below 11.5 per cent anytime soon,” he concluded.

A further reading of the committee’s communiqué is that tightening was considered and quickly discharged, but analysts feel that the committee currently has an easing bias and may make a token cut in the policy rate later this year if inflation data and expectations permit. However, the committee had thought about easing primarily for the support of credit expansion but argues that a reduction could worsen inflation and negative real interest rates.

MPC and the expected market reactions

As had been projected by analysts at Coronation Merchant Bank, the policy parameters will be left unchanged at the close of the meeting, but the bank will focus on 2 indicators when it comes to interest rates setting: weighing the economic growth against price stability and also the position of foreign investors in its currency.

“The markets are taking a different view. The huge influx of money from the redemption of CBN open market operation (OMO) bills – the key feature of Naira money markets in 2020 – is largely over. Bond investors are not the subservient price-takers that they were during 2020 and are expressing the view that rates must rise. The yield curve is much higher than two months ago and its shape is choppy, suggesting that investors are making big changes in their allocations,” said Coronation Merchant Bank analysts.

However, they say that “the MPC cannot be entirely sure that the economy is returning to growth. Although the rate of decline in GDP is improving, it cannot be sure that the report for Q4 2020 will be positive. We estimate that the recession continued into Q4. And the minutes of its last meeting (November) expressed satisfaction with the mix of CBN policies, attributing these with staving off a worse recession than what Nigeria has experienced”.

However, there exists among analysts the growing view that the MPC will slip back to an “orthodox” monetary policy this year, by tightening as a response to the inflation trends. 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 pull the economy out of recession.

All that said, at the close of the meeting last week, as contained in the communiqué, the committee settled on the CBN’s efforts to encourage lending by the deposit money banks (DMBs) and its development finance activities, as many had anticipated. Though, we also got to learn that gross aggregate bank credit increased in December by a further N770 billion to N25.02 trillion; and also, that the CBN disbursed N2 trillion through its various facilities in response to the Covid-19 pandemic; while the non-performing loans ratio worsened from 5.9 per cent at end-November to 6 per cent one month later. The committee observed this not to be a surprise in the current setting.