September 26, 2018/ FDC Research
The MPC maintained status quo on all monetary policy parameters for the 13th consecutive time since July 2016. The committee of 10 members voted 7:3 in favor of keeping rates unchanged at 14% p.a. – indicative of a growing hawkish sentiment. Three members also voted in favor of a hike in the benchmark interest rate by 150 basis points.
- Weak GDP growth numbers
- Reversal in the inflation trend
- Relative stability in exchange rate
- Depletion in external reserves
- Foreign portfolio outflows
The monetary policy committee was confronted by a policy dilemma: raising rates to stem rising foreign portfolio outflows, whilst moderating the threat of inflation or maintaining status quo in the face of weaker GDP growth numbers. The threat of external imbalances took precedence over domestic stimulation of the economy and left the committee with the realistic policy options of either tightening or maintaining status quo. In the end, the decision to hold all policy parameters was premised on the need to get more clarity on the timing and quantum of anticipated li-quidity injections into the economy from pre-election spending and increased FAAC disbursements from higher oil receipts.
Maintaining status quo means that the depletion of external reserves is likely to continue but at a slower pace. However, inflationary pressures are likely to continue to mount. High lending rates (average of 26%) will continue to deter credit demand and banks are likely to remain risk averse in the short-term due to prevailing macro headwinds. Interest rate-sensitive sectors would also continue to remain challenged.
The CBN had previously stated its intentions to give preference to employment-elastic sectors by extending credit at single-digit interest rates. The key concern to this move is that the CBN’s intervention programmes are highly subjective. They do not tackle the underlining problem of inclusive growth effectively, unlike the far reaching impact of adopting an accommodative stance.
The United States Federal Reserve is expected to raise interest rates by 25bps tomorrow. This will increase the interest rate differential in the US and trigger increased capital flow reversal from emerging market economies including Nigeria. We expect the impact to weigh immensely on the committee’s decision at the next meeting.
The IMF in its article IV consultation earlier in the year recommended a further tightening of monetary policy with the objective of achieving a single digit inflation target. Recent developments like the continuous depletion of the external reserves and the reversal in the inflationary trend, if sustained, make this a real possibility at the next meeting.
It is general consensus that increased money supply will exert some inflationary pressures in the short term, especially if output remains constant. This is on the back of election spending, which is poised to increase money in circulation and the impact of a likely increase in the minimum wage. However, the CBN might intervene using monetary instruments to mop up excess liquidity and maintain price stability. We believe the MPC will weigh the growth potential of the Nigerian economy against the weak GDP growth numbers. This is also likely to strengthen the resolve of policy makers to stimulate growth and recovery.