Thursday, September 22, 2016 8:55am / fdc
The fiscalists were strongly of the view that interest rates should be reduced as a stimulus for economic recovery. They were mostly disappointed with the status quo outcome.
In addition, in recessionary times, a contraction (increase in rates) could have worsened a bad situation. Therefore a middle-ground position of neutrality can be considered as an accommodative stance by default.
In this synopsis of yesterday’s MPC outcome, Bismarck Rewane shares his initial reaction to the controversial events of September 21.
Status Quo = Doing Nothing
Holds benchmark rates at 14% p.a.
Leaves all other variables unchanged
May reduce T/Bill rate at auction tomorrow
Why these decisions
Headline Inflation at 11year high of 17.6% - Increasing
Month on Month price level annualized at 12.8% - Decreasing
Inflation expectations dampening
Why the decision??
External reserves at a 3 year low – $24bn
Segmented and misaligned exchange rate N305/$ (IFEM) - N425/$ (Parallel)
Economy in anaemic mode
Tight Monetary Conditions Stifle Growth
Paradox of thrift
Negative GDP growth (2.42%)
In 3 months CBN mopped up N7.41trn
33.41% of money supply
Choking the economy
Worst thing during a recession
T/Bill rates at 18% p.a.
Effective yield of 21%
Tax free rate of 30% p.a.
Recession Score Card – 9 Red, 3 Amber
What has been done so far
Compare with SSA
Outlook – Slow Recovery
Reduce government debt service from 28% to 20% of revenue
Increase capex from 12% to 20%
Reduce nominal and effective interest rate by 5% p.a.
Inflationary pressures will continue
Naira will weaken in the short term
Expect T/Bill rates to decline
External reserves to decline after
Settlement of forward deliverables on Friday $1.65bn