CBN Resists Political Pressure, Retains Rates | Independent Newspapers Limited
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CBN Resists Political Pressure, Retains Rates

cbn; interbank, external resesrves
Posted: Sep 21, 2016 at 4:25 am   /   by   /   comments (0)


Bamidele Ogunwusi


Lagos – The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) on Tuesday retained all policy monetary instruments at their current level resisting political pressure to loosen policy even as the finance minister called for lower borrowing costs to help stimulate an ailing economy.

Godwin Emefiele, governor of the CBN, who made the disclosure at the central bank headquarters in Abuja, said the committee decided that monetary policies alone could not totally save the economy.

He also called on the government to complement the CBN’s monetary policies.

The MPC’s decision is seen by many as a restriction of political pressure to loosen policy and kept its main lending rate unchanged even as the finance minister called for lower borrowing costs to help stimulate an ailing economy.

All 10 members of the MPC voted to keep interest rate at 14 percent. Cash reserve ratio (CRR) and liquidity ratio were also maintained at 22.5 percent and 30 percent, respectively.

The CBN had raised the monetary policy rate by 200 basis points in July to lure foreign capital and help prop up the naira.

“Loosening monetary policy now is not advisable as real interest rates are negative, pressure exists on the foreign-exchange market, while inflation is trending upwards,” Emefiele said.

Adding that borrowing at lower rates “will stimulate demand for goods without taking action to boost industrial production of goods. Too much money chasing too few goods will worsen the inflationary condition.”

However, Finance Minister, Kemi Adeosun, said in an interview with broadcaster CNBC Africa that the MPC should reconsider the previous increase because it’s more important to focus on growth than on inflation.

Adeosun said she wanted the bank to reconsider a hike to interest rates which it announced at its last meeting in July to help support the naira and attract foreign inflows in bond and equity markets.

Analysts believe this is a subtle message to the CBN informing it of where the government’s interest lies in terms of fiscal policy. It also further buttresses the suggestion that there is a mismatch between fiscal and monetary policies, a situation many blame for the worsening economic situation.

Ayodele Salami, chief investment officer at Duet Group in London, said the members of MPC “do not take their direction from the government. The fact that the finance ministry was calling for a cut in rate and the CBN chose not to follow the request reinforces some of the credibility of the CBN.”

Emefiele, however, said the CBN had been down this road, and it was sure that cutting rates without appropriate fiscal plans may not help the economy, urging the fiscal side to fasten the budget-implementation process.

He said he was more optimistic about the inflow of foreign investment today than he was during the last MPC meeting, further stating that $1 billion had come into the economy in the past two months.

“Monetary policy alone can’t move the economy out of stagflation and fiscal intervention is needed to complement the central bank’s work and there are no quick fixes for inflation and the current stance will help to limit price growth”, he said.

Michael Famoroti, an economist at Lagos-based Vetiva Capital Management, said the “policy of holding the rate is more for price- and foreign-exchange stability than growth, which is consistent with the central bank’s mandate. Leaving the rate at 14 percent is to keep attracting inflows.”

While the MPC resisted giving in to political pressure to cut interest rates, “we expect markets to be disappointed with this outcome,” Razia Khan, head of Africa macro research at Standard Chartered Plc in London, said in an e-mailed note. “Improved inflows are needed to provide a more concrete safeguard against higher inflation.”

Pabina Yinkere, ?Head, Research at Vetiva Capital Management tweeted: “I keep saying this and no one listens. FX is what we need to focus on now. (The) economy is too sensitive to it.”

Khan expects the members of the MPC to tighten rates “today to safeguard foreign exchange stability, send clear and consistent message on policy direction (which are) very necessary for confidence.”

For her, the nation is in a weak growth trajectory and that in a “foreign exchange constrained environment, banks will be cautious about lending. Lower interest rates will achieve little.”

She also noted the need for Nigeria to focus on “consistent policy and consistent anti-inflation, pro-naira stability stance (which) will do much to reduce debt service costs long term.”

Experts at United Capital believe that though they did not expect significant changes to current dynamics at the equities and fixed income markets but stressed that “the equities market will likely continue to oscillate between the bulls and the bears in the near term, with investors likely to continue to lean more towards short term tactical play, pending further clarity on the domestic macro and policy fronts. Also, yield in the FI market is set to remain elevated, with trajectory to be shaped by system liquidity gyrations, pace of OMO issuance by the CBN and inflation expectations”.

Managing Director of Cowry Asset, Johnson Chukwu, said the MPC decision was justified given the above considerations, especially with the limited tools available to CBN.

“This should help restrain inflationary pressure and buy time for fiscal authority to begin to complement efforts of the monetary authority.

“We expect the fiscal authority to complement monetary counterpart by improving ease of doing business and provide infrastructure to help boost productivity and hence spur economic growth. Government can also divest public sector assets to help boost external reserves with their dollar proceeds. This will reduce forex rate which businesses need for importing machinery and non-locally source raw materials”, he said.