Despite Concerns over Food Inflation, Analysts Justify MPC’s Tight Monetary Stance

Kunle Aderinokun and Bamidele Famoofo

Following the decision of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to retain the base interest rate at 14 per cent, for the umpteenth time, economists and money market experts have responded. Though, the decision was in line with their expectations, they expressed reservation about the level of food inflation, which is still high. They justified CBN’s decision to maintain the hard stance, given the impact of activities in the lead-up to the forthcoming general elections on monetary policy, the analysts expressed concern that food inflation was still above the threshold. 

The April meeting was the first time this year that the MPC met, after it eventually formed a quorum to legally meet and take monetary policy decisions.

Defending the decision of the MPC to hold the monetary policy rate (MPR) at 14 per cent in the last 18 months, with other variables also remaining fixed, CBN Governor Godwin Emefiele said, “On the argument to hold, the committee believes that key macroeconomic variables have continued to evolve in a positive direction in line with the current stance of macroeconomic policy and should be allowed more time to fully manifest.”

Another argument pushed by MPC was that further tightening would strengthen the impact of monetary policy on inflation, with complementary positive effects on capital flows and exchange rate stability. But Emefiele and his team at the MPC are not unaware that their decision to hold interest rate at its present level could serve as disincentive to economic growth. “Nevertheless, it could potentially dampen the positive outlook for growth and financial stability. However, the committee is of the view that loosening would strengthen the outlook for growth by stimulating domestic aggregate demand through reduced cost of borrowing.”

The MPC resolved to maintain its hard stance because, according to it, relaxing the MPR and other variables could lead to a rise in consumer prices, generating exchange rate pressures on the currency in the process. The committee also believed that loosening could worsen the current account balance through increased importation.

A Lagos-based economist, Dr. Boniface Chizea, could not agree less with the MPC. Chizea said, “I thought that was on the cards. As the saying goes, if it is not broken why mend it. We have witnessed steady recovery of the economy from growth in notional GDP to persistent downward decline in the rate of inflation for about 12 months now. And as policymakers, the likely inclination would be not to rock the boat.”

Chizea argued that the widespread expectation of Nigerians, especially those in the productive sectors of the economy to see rates cut was not realistic at the present time.  “Now the expectations of most economic agents is to see some action in the direction of reduction of the base interest rate; the Minimum Rediscount Rate (MRR), which has been sticky at 14 per cent, despite the nudging by the fiscal authorities for an indicative notional reduction, as it is argued, to make cost of funds cheaper to boost the appetite of small and medium scale enterprises, the acknowledged engine that has the potential to catalyse rapid growth in economic activities for increased demand for credit. But the fly in the ointment is that inflation rate, though we have witnessed a decline, is still above the rate of inflation, which the last time I tracked was at 14.3 per cent,” he stated.

To Chizea, reduction in MRR at the moment would be a clear disincentive to the informed corporate treasurer in terms of patronising bank deposit facility at the risk of paying an inflation tax. Such development would worsen the liquidity in circulation outside the banking system and blunt the effectiveness of monetary policy instruments, he said.

On his own part, a lecturer at the Department of Economics, Lagos Business School (LBS), Dr. Bongo Adi, said the decision of the MPC to hold MPR at 14 per cent in the last 18 months was due to government’s high deficit and the need to repay its huge debt.

Nevertheless, Adi believes it is high time the MPC changed its stance to help boost economic activities, as government revenue profile has improved in the last few months with the economy’s recovery from recession.  “It is expected that by now rate should be relaxed to drive the real sector,” he said. “But what l can see that made the MPC to continue to hold MPR at 14 per cent is fear. The CBN is afraid that the forthcoming general elections will fuel inflation.”

However, Head Research, SCM Capital, Mr. Sewa Wusu, said the MPC’s decision to retain all the monetary variables at current levels was in line with expectations. “The fact that all macroeconomic indications are supporting recovery gave the committee the leeway to hold rates.”

But Wusu said the onus was now on the government to make more policy pronouncements to further support growth.  He noted that though inflation had witnessed a reduction, it was still on the high side when compared to the target threshold.

“My view is that the MPC considers the current anchor rate as tight enough to combat the pressures emanating from prices, particularly as election spending cycle kicks in. That said, the decision to hold the rate was just in line with expectation,” Wusu stated.

Likewise, CEO, The CFG Advisory Limited, Adetilewa Adebajo, said the decision was “not unexpected from a new team trying to find its feet.”

But Adebajo believed, “Inflation has established a downward trajectory and this action of holding will only delay economic growth, as the expected stimulus from the budget capex is delayed as a result of non-passage by the legislature.” Lamenting the inflationary consequences, he said, “Food inflation has remained stubbornly high as a result of the security problems in the food basket in Benue, Plateau, Taraba and Adamawa states.

“Rates this high are not sustainable for government debt service and will also, eventually, compromise the real sector recovery and GDP growth, which for the last three years has not even equalled the rate of our population growth of three per cent.”

Director, Union Capital Markets Limited, Egie Akpata, also stated that the decision of the MPC to maintain the status quo was expected. Akpata based his view on the fact that nothing material had happened this year to warrant a change from their current position. “Based on their observations around inflation, exchange rates etc., it is possible that this status quo might be maintained beyond the next MPC meeting.”

According to him, “Apart from rising oil prices, there is no big idea being pursued by the fiscal authorities that will change the trajectory of the economy. Passing the 2018 budget would only put pressure on the FGN to continue its borrowing spree and reduce the ability of the MPC to cut rates. Banks have already cut deposit rates by almost as much as the drop in T-bill yields. So their net interest margins are not under so much pressure that they would significantly increase their loan creation.”

Akpata said, “The CBN can drive interest rates lower by cutting the rates paid for OMO bills. Rates for T-bills at the primary auction have been falling and fell again at Wednesday’s auction. But the CBN has to manage the balance between keeping the naira attractive to foreign portfolio investors and dropping interest rates with the hope that it will lead to increased demand for credit, which should stimulate the economy.”

However, Chief Economist and Managing Director, Global Research, Africa, Standard Chartered Bank,  Razia Khan, noted that keeping the policy rates was against the bank’s expectation. Khan, however, pointed out that the decision was in line with the market’s consensus.

Nonetheless, Khan said, there was much discussion about the monetary policy measures instituted so far and their impact on the economy. “It may be that the MPC will wait until for confirmation of the deceleration in headline CPI, which we expect over the coming months, before it cuts its policy rate,” said. “For now, the MPC remains concerned about the relative stickiness of food price inflation in Nigeria, notwithstanding weak demand, weak economic performance, and weak credit growth.”

She added, “While we continue to anticipate further MPR easing over the course of the year, it is clear that maintaining FX stability is paramount.  The CBN will not do anything that is perceived to endanger this.

“The hope appears to be that the federal government steps to deal with contractor arrears, and that will help to lessen NPLs in the banking system.  Much hope is also placed on ‘rapid passage’ of the 2018 budget to lift the economic outlook.”

Expressing the bank’s position, Khan stated, “While we are also concerned about the stickiness of food price inflation, we think the base effect combined with weak demand, will be overriding. Inflation data should soon show a more pronounced improvement.” 

She explained, “Given that the 2018 budget is unlikely to be passed before May, and given that implementation of the budget may take even longer, weak money supply growth remains a key concern. Credit growth to the government it is strong, but is doing seemingly little to boost overall economic activity.”

But chief economist believed, “Notwithstanding the improvement in oil earnings, downside risks to the outlook for the Nigerian economy still predominate. The CBN will try to counteract this through its targeted provision of subsidised credit to certain sectors, at below-inflation interest rates, in line with what it calls its ‘development objective’.

“We believe, however, that the longer term strengthening of Nigeria’s monetary and banking framework would be better served by greater reliance on the MPR itself as a signal of monetary policy intent.”