Nigeria: MPC As Enabler for Sustained Recovery

1 December 2021

Nume Ekeghe writes on the economic impact of the recent decisions taken by the Monetary Policy Committee in its bid to sustain recovery.

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria rose from its final meeting for the year recently without any change in its decision. The committee by unanimous vote, decided to retain the Monetary Policy Rate (MPR) at 11.5 per cent. Members of the committee also voted to retain the asymmetric corridor of +100/-700 basis points around the MPR, the CRR at 27.5 per cent and the Liquidity Ratio at 30 per cent. These considerations according to the Governor of the CBN, Godwin Emefiele lead the Committee to hold all policy parameters constant to support the enabling environment for sustained recovery.

MPC Considerations

The committee had put into consideration the growth level of the country's Gross Domestic Product, inflation figures amongst others in its decision. Inflation figures having soared to 19 per cent in the year had been on the decline, dropping to 15.99 per cent as at October 2021.

Similarly, the country having emerged from a COVID-19 induced recession has been on the growth trajectory with the third quarter GDP recording a 4.03 per cent growth rate, albeit a slower growth compared to the second quarter growth rate.

Considering these measures, the MPC members said given the level of its conviction about the efficacy of its actions on macroeconomic variables, they felt that the tightening would further help to rein in inflation aggressively. The MPC nevertheless feels that tightening policy would increase cost of funds and constrain output growth.

"On the other hand, whereas loosening will lower policy rates, ease liquidity pressures, and stimulate additional credit creation which will boost output growth, MPC also thinks that loosening will further widen the negative real interest rate gap and compound the price distortions in the money markets which could fuel inflationary pressures.

"As for whether to hold its existing stance, MPC believes that the existing monetary policy stance has supported the growth recovery and should be allowed to continue for a little longer for consolidation to achieve the MPC mandate of price stability that is conducive for sustainable growth. The Committee also feels that a hold stance will enable it to carefully appraise the implications of the unfolding global development around policy tapering and normalisation by advanced economies." The MPC communique stated.

Reviewing the Decision

Reviewing the decisions of the MPC, analysts at FBN Quest said it stressed the negative impact of insecurity across the country, and not solely food producing areas, on business confidence, external investor sentiment and food inflation.

"It calls on the security agencies to intensify their efforts to defend the free movement of people and goods. The committee again finds the banking industry to be in good health. The capital adequacy and liquidity ratios are comfortably above their prudential limits. The ratio for non-performing loans is still a little over the benchmark of 5.0 per cent yet declined again in October, to 5.3 per cent.

"The CBN's growth forecast for this year remains 3.1 per cent, compared with the FGN's 3.0 per cent and the IMF's 2.6 per cent. All three look on the low side, given the better-than-expected result of 4.0 per cent for Q3 '21. Growth for 9M '21 reached 3.2 per cent and the traditionally best quarter is yet to come. Double-digit growth year on year in trade for two successive quarters is particularly welcome in our view since it is the most accurate barometer of economic activity," the analysts said.

Analysts' Take

The decisions on the MPC members were however expected as analysts believed the concerns of the committee are justified. Analysts are of the view that the "wait and see" attitude of the committee is to allow its previous policy have an effect window, while waiting for the fiscal policy makers to also put in measures that would impact the economy.

To analysts at Cowry Assets Management the, "Committee's decision to hold rate was in line with Cowry Research expectation given the positive local economic variables recently printed Q3 2021 GDP grew by 4.03 per cent, October inflation rate fell to 15.99 per cent and the recent appreciation of the Naira against other foreign currencies. Hence, going forward we feel that the MPC would continue to support the fiscal authority in its drive to further boost production output."

According to Head, Financial Institutions Ratings at Agusto & Co, Mr. Ayokunle Olubunm, "A lot of us were not surprised being the way things turned out. It is very tough decision for the MPC because it is going to be very difficult to increase rates given that the economy is still struggling and they can't reduce rates further because everybody is complaining that rates are low enough."

"I think what people were looking forward to was not the rates but other major decisions that would be made. This is because at the two previous MPC meetings, the CBN announced major decisions pertaining to the foreign exchange market. So what people were looking forward to was something dramatic but in terms of rate no one expected a significant change." He stated.

Likewise, analysts at Cordros Research said the decision of the committee was in line with their expectations, saying the committee expects that with the sustained interventions by the CBN, economic activities would continue to normalise in the short-to-medium term leading to improved output growth and lower inflationary pressures.

They stated, "We observed that a recurring theme at the meeting was the likely impacts of the normalisation of monetary policy by central banks in advanced countries. We think the concerns of the Committee are justified given the attendant effect of rising global bond yields on capital flows into emerging economies like Nigeria.

"Moreover, there has been a chorus among systemically critical central banks to wind down their asset purchase programme. Thus, we think the underlying tone suggests the Committee is bracing up for a change to a hawkish policy from H2-22 when we believe the Committee will judge that substantial progress has been made in supporting economic recovery and the US Fed would wind down its net asset purchases."

Analysts at FBN Quest say the MPC members plan to maintain this stance for "a little longer" so that the gains from the efforts of the monetary and fiscal authorities can multiply. Additionally, it favours the wait-and-see position because it can better respond to changes in the uncertain global environment.

"Tightening, in the words of the communiqué, would boost the cost of funds and dampen output growth, although it would ease pressures in the foreign exchange market. Loosening, in contrast, would give a lift to inflation and push up negative real rates of return for investors. The CBN's optimal contribution in the committee's view, not that it is stated explicitly in the communiqué, is to accelerate its many development finance initiatives, which are listed in greater than usual detail, "they said.

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