MPC: CBN May Retain Rates, Cut Liquidity Ratio, CRR | Independent Newspapers Limited
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MPC: CBN May Retain Rates, Cut Liquidity Ratio, CRR

cbn; interbank, external resesrves
Posted: Sep 19, 2016 at 4:55 am   /   by   /   comments (0)


*Analysts Disagree On Key Policy Expectations


Bamidele Ogunwusi



As members of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) begin their 252nd meeting in Abuja today, there are indications that the meeting will focus on the current recession so as to proffer policies that would stem the dwindling domestic economy.

Economic watchers are uptick that the MPC will tackle the triad issues of inflation, unemployment and GDP growth, with most calling for rate retention and cuts in liquidity ratio and cash reserve requirements to reflate the dwindling economy.

Specifically, they are calling on the MPC to retain monetary policy rate (MPR) at 14%, maintain asymmetric corridor of +200/–500 basis points around the midpoint of the MPR, reduce cash reserves ratio (CRR) to 20% and cut liquidity ratio to 25%.

Experts at Time Economics, in their report on the meeting, said the triune data of inflation, unemployment and GDP growth have been disappointing since the start of the year and would likely continue to do so in the nearest future.

“In the absence of new shocks to the system, we expect inflation to rise to 20% by year-end driven by factors outside the control of monetary policy, before retreating to low double-digit level by mid-2017. Growth on the other hand is expected to slightly pick up in the second half of the year as government ramps up spending to stimulate the flow of economic activities.

“However, we anticipate that a slight uptick in growth in the remaining two quarters of the year is unlikely to be enough to slow the pace of rising rate of unemployment in the country. This, when adjusted for falling real income, will have serious implications for consumer spending, corporate spending and indeed financial system stability as companies struggle to adjust to these shocks. The committee, in our view, will pay close attention to these developments,” the report said.

They said the CBN should retain the MPR at 14%, maintain asymmetric corridor of +200/–500 basis points around the midpoint of the MPR, reduce cash reserve ratio (CRR) to 20% and cut liquidity ratio to 25%.

Dafe Edeki, a senior analyst at Delta Investments, said the CBN’s chances of luring foreign investors would depend, to a great extent, on the type of decisions that it takes at the meeting, which would be concluded tomorrow.

He said: “The grim figures released by NBS have led to widespread calls for CBN to cut interest rate. But CBN knows that if it heeds this call, its quest to attract foreign investors would be made more difficult.”

Indeed in the last few meetings, the focus of the committee has largely been on combating inflation to ensure price stability and attract foreign capital inflows. However, with the economy officially in recession with a bleak short-term growth outlook, we expect the focus to firmly shift towards growth.

Nonetheless, with inflation rising by 17.6% in August and negative real interest rate increasing to – 3.6% consequently, it remains unlikely there will be a cut in the benchmark interest rate as such action could risk eroding the credibility of the MPC.

Moreover, the pursuit of an expansionary monetary policy in order to support growth, in the face of rising inflation and currency depreciations could prove to be counter-productive, particularly in the absence of complementary fiscal policy measures.

Analysts at United Capital expect the MPC to maintain its hawkish stance over half year despite the contraction in GDP, which conventionally warrants monetary easing.

“We do not see scope for easing in the near term as we believe the MPC seems to have settled for price stability, effectively conceding to its limited ability to influence growth without complimentary fiscal stimulus.

“Our sense is that the committee is now anchoring its fight against inflation on the strength of the domestic currency with a keen eye on FPI. More so, the MPC may take some reprieve in the recent piecemeal injections of fiscal liquidity and leave rates sufficiently tight in its next meeting,” they said.

During its July meeting, the committee considered a number of challenging domestic and external macroeconomic conditions that included deteriorating economic growth, rising inflationary pressures, protracted weak currency, depressed oil prices, fiscal policy inertia, Brexit vote, and portfolio inflow concerns.

Its decision to increase the monetary policy rate (MPR) by 200 basis points to 14%, from 12%, reflects the necessity to restrict monetary allowance for price increases, and provide a credible basis for the attraction of portfolio flows, as well as ease pressure on the naira. The committee left liquidity ratio, cash reserve requirements and the asymmetric corridor around the MPR unchanged.

Since the July meeting, second quarter GDP growth data released by the National Bureau of Statistics (NBS) confirmed that the economy has fallen into recession, as output contracted by 2.06% in Q2 2016, compared to the -0.4% recorded in Q1 2016.

Headline inflation rose to an 11-year high at 17.6% in August, compared to 9.62% recorded at the start of the year. Consequently, real income, consumer spending and business investments are collapsing. Companies, in response, have continued to cut costs and lay off workers with unemployment rate climbing to 13.3% in Q2 2016, from 12.1% in Q1 2016.

In the light of these severe and growing macroeconomic headwinds, the committee will once again be required to make tough decisions amidst limited policy options.

Respondents, in the Central Bank of Nigeria (CBN) Inflation Attitudes Survey Report  (IASR) for the third quarter 2016 published last week, said they preferred higher interest rates to higher inflation and that the economy would end up weaker if prices start to rise faster than they do now.

Majority of the respondents in the survey conducted between August 1 and 13, 2016, with a sample size of 1,950 households in 350 randomly selected enumeration areas (EAs) across the country, said they are aware that the CBN influences the direction of interest rates to control inflation and that a drop in interest rates is best for the nation’s economy.

However, given a trade-off between inflation and interest rates, more respondents preferred higher interest rates to higher inflation, arguing that the economy would be weaker if prices rise faster than they do now.

Specifically, according to the survey conducted by the CBN’s Statistics Department on a quarterly basis since June 2009, 55.7 percent of the respondents “indicated that it would be best for them personally if interest rates went down, 16.3 percent indicated it would make no difference, while 18.0 percent of the respondents opted for higher interest rates.”

On whether it would be best for the economy for interest rates to rise or fall, 41.1 percent indicated that a fall in interest rates would be best, 21.7 percent opted for higher interest rates, while 19.5 percent believes it would make no difference.