Slim chance CBN’s MPC bold enough to tweak rates

By Charle Abuede

• Experts say economy unhinged as inflation bites‭ ‬
• CBN will tread the delicate path between‭ ‬pro-growth policies and anti-inflationary policies

Economic experts have expressed concerns on the current twist within the Nigerian economic landscape which continues to put the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) in a tight corner, providing them little room for a rate manoeuvre as they converge for the second statutory meeting of the body this year.

As the MPC meets Monday and Tuesday to deliberate on a number of indices to help decide whether to hold or tweak the rates, inflation has gotten in the way already reaching a four year high at 17.33 per cent, as well as other major talking points such as the recent exit from recession with minimal growth at 0.1 per cent in Q4 2020, depleting external reserves in the face of rallying oil price in the global market, the coronavirus pandemic and vaccines rollout worries, rising unemployment rate, which is now regarded as the highest in the world at 33 per cent, among other indices.

In 2020, committee acted dovish in a bid to stimulate economic growth in the face of a pandemic which crippled activities and crushed several economies, joining other central banks in other climes to slash policy rate on two occasions. However, at the last assembly of the committee, in the light of lingering uncertainties associated with the COVID-19 pandemic, stagflation with the existence of insalubrious inflation numbers, economic recession, it retained the policy rate at 11.50 per cent for the second time since the last cut from 12.50 per cent at the September 2020 MPC meeting. In the view of the MPC, the decision comes in the pursuit of a systematic synchronization of monetary and fiscal policy accommodation through its developmental finance initiatives, aimed at mitigating the impact of the COVID-19 pandemic on Nigerians. Meanwhile, the CBN has squabbled that inflationary pressures will temperate as growth in output springs back, supported by the monetary and fiscal stimulus on offer.

Slim chance of the MPC raising the MPR from analysts’ standpoints

In the meantime, a myriad of experts who spoke to Business A.M. have said that the setting of official rates by the Monetary Policy Council (MPC) of the CBN will continue to tread the delicate path between pro-growth policies and anti-inflationary policies. Nevertheless, the current Monetary Policy Rate is 11.5 per cent and the MPC will conclude its second meeting of 2021 on Tuesday. In view of inflation, a cut in the MPR seems unlikely. In the context of fragile growth, the MPC 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.

Taking a stand from an economic analyst, the CBN is stuck between maintaining exchange rate stability, 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 that would create jobs and rein in on the spiralling inflation.

According to the analyst: “My expectation is that the CBN’s MPC will maintain this focus of switching its monetary policy stance from exchange rate targeting to development financing and reducing the cost of borrowing to increase economic growth that would create jobs and rein in on the spiralling inflation in its next meeting, while allowing its Naira 4 Dollar promo scheme to begin yielding results that can help to offset the pressure on the FX market. In that light, I see them keeping the MPR and other metrics constant to further allow for the sustenance of the gains amassed partly from the last MPR cuts.”

Coronation Merchant Bank analysts, in their assertions, said: “In terms of progress towards the rate of inflation, there is little argument. On the other hand, the CBN believes that the low-interest rate regime of 2020 was important in alleviating the effects of recession and indeed, 2020’s recession was lighter than mid-year IMF and World Bank predictions. So, allowing market interest rates to rise now could put a brake on the recovery as the non-oil economy grew by 1.69 per cent year on year in Q4 2020. For this reason, the CBN might tolerate rising rates, but only so far.”

As the MPC concludes its meeting, analysts struggle to see any decision other than an unchanged stance. While the CBN does not formally target inflation, confining itself to a reference range of between 6 per cent year on year and 9 per cent for the headline measure, the trajectory of inflation is such that it would be a challenge to argue for further monetary easing.

In the views of Uche Uwaleke, a capital market professor and lecturer at the Nassarawa State University, “I expect the MPC to hold the rates in March. Yes, inflation rate is rising but economic recovery is still weak at 0.11 per cent in the previous quarter. Also, inflationary pressure is more from cost-push factors. I expect that the MPC will advise the CBN to continue to use development finance initiatives through increased interventions to support economic recovery especially via stimulation of agricultural output to stem rising inflation.”

Lukman Otunuga, London-based senior research analyst at the global forex trader, FXTM, in his commentary 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 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.

“The monetary policy committee once again will express concern about rising inflation. Indeed, inflation is expected to remain elevated due to supply disruptions created by Covid-19, tightening border restrictions, the increase in VAT, and the temporary price shocks to food and Premium Motor Spirit (PMS) brought on by the short-lived food blockade from the north, as well as the Petroleum Products Pricing Agency’s (PPPRA) misguidance on a new PMS retail price at N212 per litre which was afterwards renounced by the agency. With the trajectory on inflation pointing north, interest rates are unlikely to move below 11.5 per cent anytime soon,” he concluded.

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 trendy 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.

Meanwhile, it is without doubt that the bank will focus on two 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.