Home Cover Story MPC set for another policy freeze

MPC set for another policy freeze

Godwin Emefiele, CBN Governor
Godwin Emefiele, CBN Governor


Despite the outcry for lower domestic interest rates, the Monetary Policy Committee (MPC) is expected to leave the Monetary Policy Rate (MPR) at 14 per cent as it responds to inflation jitters ahead of the 2019 general elections, say economists.

The MPC meeting schedule to hold today, Monday 24th 2018 and Tuesday 25th 2018 in Abuja, is expected to hold policy at its two year rates, regardless of the fact that inflation rate has skidded downwards from 18 per cent at the beginning of 2017 to a more recent rate of 11.23 per cent.

Inflation rate has bounced back up from 11.14 per cent August to a more recent estimate of 11.26 per cent which has triggered the Central Bank of Nigeria’s (CBN’s) inflation fears. The situation has been worsened by ongoing election spending, which has increased domestic money supply thereby creating the recent inflation blip.

“Status quo would be maintained. Inflation is rising, hence not time for downward review of rates. Unemployment is still high; oil prices and foreign exchange reserves are moderately down. All these reflect uncertainties and instability in the macro environment, hence not time to review the CBN mandatory rates downward. A wait and see attitude is likely to guide the decisions of the MPC Next Week,” says Prof. Joseph Ajibola, former President, Chartered Institute of Banking of Nigeria (CIBN).

It is expected that the MPC will focus on tackling mounting pressure on the local currency due to massive capital flight fuelled by foreign investor uncertainty about the forthcoming general election, says Johnson Chukwu, Managing Director, Cowry Asset Management Ltd.

“Nothing is happening economically, focus has shifted to politics,” he noted.

Another issue that would dominate the MPC meeting is the equity market, which has lost -14.97  per cent in the last six months, after posting 42. 3 per cent in 2017. The underperformance of the bourse traceable to foreign investors’ decision to dump emerging markets due to rising yields in the US market as they anticipate the Federal Reserve Bank to further hike interest rate in its next meeting. The Nigerian Stock Market has been dominated by bears, and it reversed the uptrend it had on Thursday as it shed -2.17 per cent to close at 35446.47 points.

“I’m of the opinion that political pressure will play a decisive role in their deliberation over than economic logic. The committee will likely play it safe and leave most of the monetary policy tools unchanged.

With the recent danger of our economy sliding back into recession; the high debt levels incurred by states; the high rate of unemployment, especially amongst youths, the rising debt level, and the dwindling foreign reserves, I believe they should come up with a policy position to put a strong check on inflationary political spending, by raising the MPR rate between 20 to 25 basis points. Unfortunately, this will hurt the employment,” posits Prof. Leo Ukpong, Dean, School of Business, University of Uyo.

He thinks CBN was running out of Monetary tools to fix all the ills of our economy.

“Would you expect any changes with elections five months ahead? I will be surprised,” queried Dr. Boniface Chizea, Managing Consultant, BIC Consultancy Services Ltd.

The CBN has been aggressively defending the Naira injecting several billions of dollars into the country’s foreign exchange market. It has reassured the public that it is well positioned to continue to defend the local currency and as well meet forex demand.

However, Nigeria’s foreign reserves has deleted by almost -3 per cent in the last one month to $44.89 billion as at September 20. Naira depreciated against the dollar by 0.11 per cent at the Investors and Exporters (I&E) FX window on Friday, having opened at N363.14, traded high at $/N365.00 and eventually closed at $/N363.68. A total of $401.69 million was transacted through the I&E window. At the parallel market, the cash rates depreciated by 10k to $/N359.80, while the transfer rate remained unchanged at $/N362.00. But it was stable at the interbank market at $/N306.30.

FSDH Research believes the most appropriate monetary policy decision under the current economic and financial market situation is to hold policy rates at the current levels. It mentioned that although there are some arguments to increase rates, the need to provide necessary incentives for the Nigerian economy to achieve inclusive growth negates an option of a rate increase.

At its meeting in July 2018, the MPC maintained the Monetary Policy Rate (MPR) at 14 per cent, with the asymmetric corridor at +200 and -500 basis points around the MPR; it retained the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) at 22.50 per cent and 30 per cent respectively. It also announced measures to provide cheaper funding for some critical sectors of the economy to boost economic activities.

Meanwhile, Olusola Ayodele, an economist and Managing Director, Yomayo Farms Limited thinks with the decline in economic growth in Q2 to 1.5 per cent, calls for urgent intervention by policy makers, especially the Monetary Policy Committee of the CBN.

He believes there is need for specific growth stimulating policies to forestall the economy to enter into another recession in the next two quarters.

“Foreign Capital imported in Q2 dropped significantly. However, there is high demand for FX for capital repatriation- due to rising uncertainty in the economy and the oncoming general election.

MPC should implement policies that will encourage stability in the FX market. Adjusting the MPR could be an alternative now,” he asserted.