Between MPC’s decision and currency market reforms – The Nation

CBN

By: COLLINS NWEZE

The Monetary Policy Committee (MPC) has held its fifth meeting for the year. The conclusions were in line with analysts’ projections. The committee maintained the status quo, reiterating the need to fully implement currency market reforms to regain credibility and push for fiscal monetary policy co-ordination in structural reforms. COLLINS NWEZE writes on what this decision means for the economy.

It is no longer news that the Central Bank of Nigeria (CBN)-controlled Monetary Policy Committee (MPC) agreed to maintain the status quo at its fifth meeting for the year, against calls from fiscal authorities for interest rate cut.

Besides, the committee assessed the challenges facing the economy and the limitations of monetary policy in tackling the headwinds. It further decided to allow reforms that have been implemented, especially in foreign exchange market.

Consequently, the 10 members voted to retain the Monetary Policy Rate (MPR), which is the benchmark interest rate, at 14 per cent; the Cash Reserve Ratio at 22.5 per cent; and the liquidity ratio at 30 per cent, among others.

Reacting to the decision, Managing Director, Afrinvest West Africa Limited, Ike Chioke, said the MPC decisions were positive for the economy and the financial market.

“We think the MPC’s decision was clearly a balancing act, as hiking rates further would have done little to thwart inflationary pressures, which remain largely structurally driven, while easing rates in response to political pressures would have communicated policy inconsistency and worsen capital account position. The CBN has further demonstrated its commitment to the policy tightening stance by aggressively mopping up liquidity in the financial system via Open Market Operation auctions at rates similar to previous auctions,” he said in an emailed report.

He added: “We believe that the decision of the MPC to maintain policy consistency and resist political pressures to cut rates will reinforce the independence of the CBN, which has come under scrutiny over the last few months, while also emphasising priority policy objectives necessary for businesses and markets to reasonably form expectations. In the medium term, we think it is also positive for financial assets as capital inflows are returning, albeit tepidly, to the market.”

Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said the MPC acted to control inflation and save foreign reserves from further depletion.

His words: “The fiscalists were strongly of the view that interest rates should be reduced as a stimulus for economic recovery. They were mostly disappointed with the status quooutcome. In addition, in recessionary times, a contraction (increase in rates) could have worsened a bad situation. Therefore, a middle-ground position of neutrality can be considered as an accommodative stance by default,” he said.

Former CBN Governor and Emir of Kano, Muhammadu Sanusi II, backed the MPC decision, saying it acted well and courageously by not following the advice of the Finance Minister, Mrs Kemi Adeosun, who called for rate cut to stimulate the economy.

The MPC, which is the highest policy making body of the CBN, chose to retain the policy rate in a unanimous vote by members. Sanusi said he supported the MPC’s decision on the grounds that it underpinned the autonomy of the apex bank. In a reaction, he said he was actually worried about the Finance Minister’s position and was also afraid that the apex bank might succumb to the minister, but that he was greatly relieved when the apex bank’s decision was announced. He said: “It is a positive thing. I was concerned that CBN would succumb. Because they did not, it means they have started being independent.”

Sanusi, who made the remarks at the launch of Afrinvest Nigerian Banking Reports, 2016, explained that if the MPR was lowered even by 200 base points, it would not increase credit from banks to the economy as envisaged because of other constraining factors.

On the other hand, he noted, a lower MPR would imply lower yields on money market instruments, which would be a disincentive to investments in the money markets, especially in the fixed income security segment and ultimately put a restraint on foreign portfolio investment inflows. He also stated that a lower MPR would fuel inflation further, which was already high.

Also, former Executive Director, Keystone Bank Limited, Richard Obire, said the central bank of every country should be independent because foreign investors look at the monetary policy of the central bank in making investment decisions.

“It is part of investors’ confidence to see that the CBN has substantial autonomy. If the independence of the CBN is threatened, it will send the wrong signal to the investment community. It would indicate that monetary policy is dictated by those close to government. However, people can voice their opinions on whether the interest rate is high or low, but cannot force the hand of the CBN on what decision to take,” he said.

According to Obire, interest rate in Nigeria is in reality, high. He added that interest rate is the price that consumers of money pay. “Consumers of money are those who borrow for industrial consumption to buy equipment, land and other production materials to sustain productive activities within the economy,” he said.

“If the interest rate is too high, as in Nigeria, then productive agents will not be able to produce. But when inflation rises, as in the case of Nigeria, the CBN will raise the price of accessing money to moderate the inflation pressure,” he explained.

He said the government should give priority to agriculture and domestic production loans, with such loans accessed at single interest rate while luxury goods should get loans at market prices.

“In every economy, there are borrowers and savers. I think the CBN is also trying to ensure that there is incentive for savers. By raising interest rate, the CBN wants interest rate to be positive for savers,” he said.

The rise in inflation rate, Obire said, was caused by the devaluation of the naira, impact of fuel price hike, electricity, diesel, among others. It has, however, made more money available to government, which should be spent to reflate the economy.

Global Market Review and Outlook

Monetary policy decisions by key central banks were the major highlights of the week. The US Federal Open Market Committee (FOMC) held its sixth meeting for the year and elected to keep the Fed Fund rate unchanged despite speculations of a possible hike.

Likewise other policy makers across regions – South African Reserve Bank Monetary Policy Committee, Nigerian Monetary Policy Committee and the Bank of Japan (BoJ) all kept their respective rates unchanged. Ahead of the OPEC meeting scheduled for next week, the debate between Saudi Arabia and Iran with regards to a cap on production lingers.

Naira/foreign reserves

The naira last week, hit a new record low of N436 against the dollar at parallel market, as dollar shortages persist in the economy.

The development came amid depleting external reserves, which stood at $24.8 billion from $25.78 billion as of August 16, representing 2.11 per cent plunge from a month ago, data from the CBN data showed.

The reserves position is expected to provide about five months import cover for the country.  Previous data on the reserves showed that they increased marginally by $40 million in March on a 30-day moving average basis to $27.9 billion and have continued to record marginal decline till current position.

The reserves were also at $28.33 billion at end-June 2015, compared with $34.24 billion at end-December 2014, representing a decrease of 17.3 per cent decline.

The fall in reserves was due to the sharp decline in foreign exchange inflow from in the economy due to continuous decline in prices of crude oil in the international markets.