Will CBN take a bite at monetary easing on a wagon?

By Phillip Isakpa & Moses Obajemu

Expect consolidation of policy initiatives on bank lending‭, ‬though

Araft of actions by Nigeria’s central bank in the last many weeks have kept analysts navel gazing what might yet come from the bank led by Governor Godwin Emefiele, one-time university teacher, one time bank chief executive. This week, no less, as the bank’s Monetary Policy Committee, which he chairs, meets to review, preview and pronounce a guide on monetary policy for the next two months.

Many analysts, including Lukman Otunuga, the senior research analyst at London-based FXTM, are caught in a fix because Nigeria, more often than not, defies fundamentals. For instance, how many analyst calls are likely to be on the button by the time Emefiele reads out the decision of the MPC on Tuesday? You can’t bet on that, we are sorry to say, but can only hope the global plays force the hands of the MPC this time around.

So, what are these global plays? In a note sent to business a.m., Otunuga suggests that there’s what appears to be a bandwagon going on out there in favour of monetary easing. But we all know that Emefiele and his team do not join any wagon, not even if it has a band that plays good music. He’s a monetary policy hard nut, many would say.

Major central banks, as Otunuga points out, looking at unfavourable macroeconomic conditions across the world, have been forced to embark on a monetary policy easing cycle to protect their respective economies. But Emefiele is a man who seems to enjoy tightening the monetary policy noose around necks.    

It is the action already taken by these major central banks that is, however, making some analysts entertain the thought of an MPC possibly taking a relaxed posture this week.

The United States’ “Federal Reserve is expected to cut interest rates for the first time in over 10 years later this month, while central banks in Asia and Africa including the South African Central Bank have already made a move,” are the examples that Otunuga cites.

He makes the bold call for Emefiele and the MPC to join this queue. But we know Emefiele is his own man on these matters. Or could it be that Emefiele is never at ease? Well, it is quite difficult to tell for a man who has the next five years to worry about the fortunes and or misfortunes of the Nigerian economy, seeing that the fiscal side has not been up to scratch in the last four years.

So what would the MPC make of this? “With economic conditions in Nigeria slowly stabilizing and inflationary pressures slowly moderating towards single digits, the CBN has the opportunity to join the monetary easing bandwagon.” Is it really true that the wagon is not for Emefiele, even if it has a band that plays his type of music? The music he loves the most? But why does he need to jump on a wagon at this time, anyway?

“Lower interest rates in Nigeria will stimulate consumption, encourage businesses to increase investment spending and give banks more incentive to [lend] to corporations and households. Given how household consumption is roughly 80% of GDP, a rate cut will be supportive of growth potential as the nation diversifies away from oil reliance,” Otunuga thinks. But what does Emefiele and the MPC think?

One thing we think could happen though is this. The Central Bank of Nigeria (CBN) will this week seek to consolidate on its recent policies of making deposit money banks to significantly improve on lending to Nigerians and businesses by perfecting all arrangements that will give teeth to the rules so far rolled out when the Monetary Policy Committee (MPC) begins its meeting tomorrow.

Industry experts also say that the CBN is not likely to cut the MPR which stands at 13.5 percent in order to see the effects of the new regulations. Besides, they say inflation has been climbing down, with the June inflation report showing that it fell to 11.22 percent as against 11.34 percent in May.

Price pressures remain too high to bring inflation back into the target band of 6% to 9% in 2019 and 2020, according to Celeste Fauconnier, a sub-Saharan Africa economist at FirstRand Group Ltd.’s Rand Merchant Bank.

The apex bank had mulled the idea of setting up an administrative framework to drive and implement the various initiatives taken to get the banks to lend. 

In an effort to spur real sector credit and ultimately achieve faster growth, lower inflation rate, job creation, and a stable exchange rate, the CBN has in recent times asked banks to commit more funds to lending to industries and individuals, as well as to ensure that the real sector receives enough funding capacity to foster growth in the economy.

The CBN stance stemmed from the reluctance of banks to lend and the fact that the banks have become the major buyers of federal government instruments, while neglecting their main duty of financing the economy

By recent guidelines, banks risk losing more deposits to CBN’s required reserve (CRR) if they fail to meet a minimum loan to deposit ratio (LDR) of 60 percent by Sept 2019. Again, deposit money banks (DMBs) cannot place more than N2 billion at the Apex bank’s Standard Deposit Facility (SDF) compared to the previous figure of N7.5 billion.

Also recently, the CBN said it would no longer remunerate daily bank deposit in excess of  N2 billion placed at its (CBN) standing deposit facility (SDF).

The SDF is a store room created by the CBN to help banks keep their excess deposits overnight.

According to a circular released by the apex bank and signed by Angela Sere-Ejembi, director, financial markets department, SDF deposit of N2 billion shall, however, be remunerated at the interest rate prescribed by the Monetary Policy Committee from time to time.

The circular titled “Re: Guidelines on accessing the CBN standing deposit facility”, addressed to all banks, said the remunerable daily placements by banks at the SDF shall not exceed N2 billion.

In the November 6, 2014 guidelines on accessing the CBN standing deposit facility, the CBN had noted the preference of banks and discount houses to keep their idle balances at its SDF, thereby “constraining the process of financial intermediation”.

As a result, the apex bank had then set the remunerable daily placements by banks and discount houses at the SDF at a maximum of N7.5 billion, to be remunerated at the SDF rate of 10 percent per annum.

However, the apex bank, at the time, said placements above N7.5 billion shall not be remunerated.