April 05, 2018 /01:40 PM/Proshare Research
At the end of the first monetary policy
committee’s (MPC) meeting for 2018, the committee kept its policy levers
untouched. Thereby sustaining the current policy levers beyond the current
period of 21 months
The position hinged on the committee’s conviction
to sustain the on-going moderation in the current account and also prevent
inflation from taking an uptick.
Even though the committee identified that the
current credit levels are low.
Rather than shave the monetary policy rates (MPR),
the bank resorted to guiding credit expansion through moral suasion and
bolstering its single digit anchor borrower programme.
Fig 1: Domestic Credit Provided by Financial
Sector (% of GDP)
Source: UNDP (human development
Obviously, the bank recognises the need to prop up
credit levels. Intriguingly, the bank is willing to achieve that by
circumventing orthodox transmission line coupled with pressing through moral
In reality how far can that go in creating any
form of needle shift? Especially for a country which has one of the highest
credit gaps in the
What Has Changed?
Inflation has dipped to 14.33% in February 2018
compared to 15.9% in November 2017 when the committee held its last statutory
meeting. Recently, price seems to have overcome it earlier flat trajectory,
evidently finding the willingness to dip downward.
The development allayed fears of possible reversal
due to the earlier trajectory witnessed in food inflation fused with the
gradually dwindling in base effect.
Moving further, food inflation became subtle as
earlier supply constrains fizzled off. Thereby making the outcome of
aggregate food inflation more predictable, the current dynamic
provides the basket the needed head room to sustain the existing trajectory.
Presently inflation has lost enough momentum to be
tagged as self-perpetuating. However, a sharp decline in
inflation like the scenario witnessed in Egypt remains distant off, given
inherent residues of inflation inertia.
The possibility of introducing a high base pay
before the general election coupled with election spending, will further limit
the window for a sharp decline.
Fig 1: Nigerian and Egyptian Inflation over
a 12-month Period
Source: NBS, ECB, CBN
Liquidity: NTB, Falling off Convexity
Most part of the first quarter of 2018, the banks
liquidity management tilted more towards a zero-sum game. Therefore, the policy
was more in tune with offsetting maturities of government securities in order
to tame month on month (MoM) inflation and avoid having excess Naira popping up
at the exchange window.
Currently, the yield on Nigeria Treasury bill
(NTB) has softened by 18% when compared to the beginning of the second half of
2017. The on-going dynamic has gradually forced rates on NTB to fall off from
earlier convexity high, underlining the “mild bearish’’ position in the money
2: NTB and Monetary Policy Rate from 2016 to 2017
Interbank Rate; More of the Same
The persistent sterilization by the central bank,
led to the interbank rates to clawing back to an upward trajectory for most
part of the 1st quarter of 2017. By the tail end of the same
quarter, the average rates of the interbank and overnight buy back
(OBB) began to dip. Such rates dipped from 24.57% and 21.35 % in February to
16.06% to 16.36% in March.
3: Call and OBB Rate from Dec 2017 to March 2018
Source: CBN, FMDQ
Holistically, the CBN’s ability to put a lid on
Naira supply through series of withdrawals have consistently
altered price within the interbank space: In part contributing to an
undercut to money supply target witnessed at the end 2017. Most importantly
there is a need to shift from a fire brigade approach with regards liquidity
management to a more robust and long term driven one.
Net Foreign Asset of Deposit Money Banks
Net foreign asset of deposit money
banks rose sharply from N 300billion at the end of Q3 2017 to N 3.8 trillion at
the end of Q4 2017. The positive spike put net foreign asset of deposit money
bank at a 7-year high. The outcome beat most market estimates.
4: Net Foreign Asset of Deposit Money Banks
The current exchange rate stability deeply rooted
in a strong nominal effective exchange rate (NEER) has rubbed positively on the
net foreign asset of deposit money banks. At the same time indicating,
banks have improved at maximizing their asset portfolio, especially between
domestic and foreign asset.
Concurrently the stock of net foreign asset of
deposit money banks, have bolstered their international net worth when compared
to the downturn.
More importantly, the healthy buffer in net
foreign asset of deposit money banks provides them some ammunition to hedge
against possible exchange rate risk triggered by a hike in fund rate.
PMI: Riding on a Positive Spell
Fig 5: PMI
Purchasing Managers Index’s (PMI) expanded by 56.7
in the month of March 2018. The PMI has maintained eleven months of successive
expansion on the back of deceleration in both prices of output and input.
The decelerating pace in price has fuelled an
increase in the quantity purchased, at the same time providing the needed leg
room for expanding production levels.
Notable economists such as Willem Duisenberg and
Ottmar Edenhofer are of the opinion that certain monetary instrument such as
the interest rate should not be tweaked unnecessarily.
Rather they should be sustained for some
considerable time so as to allow the effect to be completely felt. Although
there is a broad consensus that interest rate should not be “toyed’’ with,
given its importance.
However, sustaining a particular rate for too long
also portrays monetary policy as passive and indecisive. Many times, it ends up
creating mixed tunes due to the prolonged passive attitude of monetary
policy. For a fact we have seen the likes of Alan Greenspan and Ben
Bernanke challenge such position by tweaking rates 17 times from 2004 to
Obviously after 21 months, it is less about
inflation, time consistency, strengthening of real savings and the need for
more clarity. Rather it is all about maintaining a robust current account and
all the short-term gains that come with it.
Certainly, such position threatens the possibility
of a needle shift in itself.
Communiqué No. 117 of the MPC Meeting – Apr 03-04, 2018
Surprises, as MPC Holds Rates Steady At the End of 1st 2018 Meeting
- Prospect of
the First Rate Cut Since 2015
Research Forecasts a Growth in the Banking Sector Credit to Private Sector
Commentary: Will The New MPC Stick To Or Twist?
Policy Easing Required to Stimulate Growth - MPC Considerations and Policy
- The 260th
MPC Meeting to Hold April 3rd and 4th, 2018
Reserve Issues Statement and Release Economic Projections From Mar 20-21
Mandates Committee To Report Back In A Week on CBN and MPC Members
Monetary Policy As Headwinds Shift To Tailwinds
Dollar, Higher US Interest Rates, a Dilemma for a Central Bank With No
Direct Investment and the Central Bank of Nigeria’s Monetary Policy
Statement by the MPC Members at the 116 MPC Meeting of Nov 20-21, 2017