MPC Meeting: Analysts Canvass Adjustments In Rates | Independent Newspapers Limited
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MPC Meeting: Analysts Canvass Adjustments In Rates

Posted: Mar 21, 2016 at 1:00 am   /   by   /   comments (0)

Bamidele Ogunwusi, Lagos

As the 12-member Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) begins its second meeting in the year today, financial analysts are of the opinion that the committee is faced with difficult monetary policy choices going by the current economic developments in Nigeria and the short-to-medium term outlook.

Experts at United Capital and researchers at FSDH believe that the apex monetary body need to act fast to boost investors’ confidence in the Nigerian economy as there are arguments in favour of currency adjustment, interest rate hike and others sundry issues.

At the end of its January 2016 meeting, the MPC maintained the Monetary Policy Rate (MPR) at 11 per cent, the Cash Reserve Requirement (CRR) at 20 per cent and the Liquidity Ratio at 30 per cent.

The final MPC meeting for 2015 held in November was a watershed, as it marked the start of an accommodative monetary policy stance in response to slowing broader growth.

It was hoped that higher system liquidity would reduce borrowing costs, and increase lending to the real sector of the economy in a bid to begin the process of revenue diversification which was long overdue.

Despite higher system liquidity however, credit growth seems to have remained muted. January 2016 saw oil prices touch new lows with extended pressure on the currency which widened the differential between the official and parallel markets significantly.

Thus while the market expected to see some major policy decisions especially around foreign exchange at the January meeting, MPC members (10 out of 12 in attendance) unanimously agreed to leave key policy variables unchanged.

Some experts believe that the MPC’s concerns at its last meeting about the weak and fragile global economy still persist. The Organization of the Petroleum Exporting Countries (OPEC) projects the global Gross Domestic Product (GDP) at 3.2 per cent in 2016. OPEC revised its growth forecasts downwards across geographic regions, with the exception of the Euro-zone.

They added that issues surrounding the shortage of foreign exchange in the country and the weak purchasing power were responsible for the sluggish growth recorded in fourth quarter of 2015. The current low GDP growth rate justifies monetary policy easing to boost growth.

In the research earlier conducted by FSDH Research which released a growth forecast of 3.07 per cent for 2015.The oil sector recorded a negative growth rate of 5.45 per cent, from the negative growth rate of 1.32 per cent in 2014. The Nigerian economy grew by 2.79 per cent in 2015, compared with 6.22 per cent in 2014.

The non-oil sector recorded a growth rate of 3.75 per cent in 2015, lower than the 7.18 per cent recorded in 2014. In Q4 2015, the economy grew by 2.11 per cent (year-on-year), compared with 5.94 per cent in the corresponding period of 2014.

The pass-through effect of imported inflation from the weak Naira fed into the domestic prices in February 2016. The inflation rate in February 2016 increased to 11.38 per cent, from 9.62 per cent in January 2016.

The upward pressure on the general prices, according to experts at FSDH, is expected to continue and could push the inflation rate higher. Although the exchange rate has appreciated at the parallel market, the country is faced with violence in a food producing state.

“These factors coupled with the fuel shortages could push up food prices. The appropriate policy response to the rising inflation rate is to hike rates. This move may conflict with the growth objective of the CBN and Federal Government of Nigeria (FGN)”, they said.

To analysts at United Capital, they believe that the MPC still holds the view that monetary policy adjustments in the Nigerian case, can and should be used to spur lending to critical sectors of the economy. The Committee is likely to toe this line in the meeting, favouring a continued accommodative monetary policy.