Thursday, May 24, 2012 17:00hrs / Tola Odukoya / dunnlorenmerrifield 

Nigeria’s benchmark rate held at 12.00 percent

Key highlights.  Nigeria’s Monetary Policy Committee (MPC) met on May 21^st and 22^nd, 2012 to review domestic and international economic conditions in order to re-evaluate the options for determining the policy direction for the next two months. The MPC’s key considerations include the slow recovery in global economic environment underpinned by high downside risks due to the persistent euro zone debt crisis; slowdown in domestic output; sharp decline in domestic agricultural output and oil and gas sectors and; resurgence in inflationary pressures.

MPR maintained at 12.00 percent. Consequently, the MPC voted in favour of holding the Monetary Policy Rate (MPR) at 12.00 percent with interest rate corridor of +/-200 basis points; Cash Reserve Ratio (CRR) was also retained at 8.00 percent and the minimum liquidity ratio at 30.00 percent. We note that this makes it the fourth consecutive time the committee would be leaving the policy rate unchanged at 12.00 per cent (fig. 1). This was done in view of the lingering effects of monetary tightening - to reduce inflationary pressures - carried out in the previous fiscal year. We expect that money market rates will remain fairly stable at the current high levels as MPR was maintained. However, we anticipate a slight drop in yield as prices inch upwards across board. We are equally inclined to highlight that we had recommended a reduction in policy rate given our view on the need for growth in domestic production, high unemployment and weak currency. (Nigeria Bond Watch_210512)

Economic growth is crucial. According the latest report from Nigeria’s National Bureau of Statistics (NBS), the economy grew by 6.17 per cent (fig.2) in the first quarter of 2012, down from 7.68 per cent in the fourth quarter of 2011 and 7.13 per cent in the corresponding period of 2011. Prevailing economic realities has led to a projection of real GDP growth rate of 6.50 per cent in 2012, down from 7.45 percent in 2011. We also note that key sectors notably agriculture, power and petroleum sectors recorded a decline in growth in the first quarter of 2012 compared to the corresponding period in 2011. In line with the above, the MPC has highlighted the need for monetary policy to aid the consolidation of a positive and stable longer-term macroeconomic environment conducive for growth and development, which is consistent with our position. Following the shift in policy stance in 4Q 2010, we have consistently argued that a high interest rate regime reduces the availability of funds to the real sector which is supposed to drive economic growth. We are also inclined to note that prices and output is largely dependent on fiscal and structural policies than on the monetary position which goes further to support our argument that inflationary threats cannot be successfully curtailed by the contraction of the monetary policy without a commensurate tighter fiscal stance or a redirection of government spending (Nigeria: Inflation, March 2012).

In our opinion, we reiterate our position on the need for a low interest rate regime to keep the economy on the path of sustainable growth. There exists a trade-off between economic growth and inflation. We note that inflation is not an end in itself and should not be aggressively pursued at the expense of economic growth. We are however optimistic that there will be a possible reversal in policy stance in the days ahead, given the MPC’s current “neutral” position, the reaction of the financial markets and the clear slowdown in domestic output. 
 

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