282 MPC Policy Meeting Lukewarm as CBN Takes Time to Monitor Global Developments


Thursday, November 25, 2021/1:45 PM /AbdulQudus Isiaka, Proshare Research/ Header Image Credit: CBN


The CBN MPC expectedly decided to hold all policy parameters after its two-day meeting between 22-23 November 2021. Analysts had correctly predicted the outcome given that the inflation rate has continued to decline, falling most recently to 15.99% in October.  Meanwhile, the recent Q3 growth figures released by the National Bureau of Statistics last week suggest a 4.03% growth in real GDP. Even though growth has been supported chiefly by expansionary fiscal policy, the MPC believes its centrist approach has prevented a contraction in output.


As an alternative to conventional monetary policy instruments, the regulator has continued to manage inflation and excess liquidity with heterodox policy instruments. Emefiele noted that by deciding to hold rates constant, the Committee would have an eight-week respite to assess the impact of developing global monetary policy actions on the Nigerian economy.



Chart 1: Monetary Policy Rate (%) (2013-2021)

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Source: CBN, NBS, Proshare Research


Barging into the Global Economy: US, UK, Ghana, South-Africa

The Committee chairman and CBN governor noted that the US's normalisation and quantitative tapering policy would have implications for emerging economies. The FOMC had, at the beginning of the month, decided to begin the reduction of its monthly $120bn bond purchase program accelerated rate given an earlier than planned raise in the rates. Since January, the US Inflation rate has continued to spiral, reaching 6.2%, the highest in 31 years in October. In the UK, gas and labour shortages have caused a rise in prices causing inflation to get to a decade high of 4.2% in October. Some Bank of England MPC members have called for an increase in the base rate to rein inflation. Meanwhile, in a move targeted at managing inflation, the BoE's committee members voted against extending its bond purchase programme. Analysts believe that while the UK and other advanced economies are signalling the US policy stance, the FOMC would not raise rates until it completes a wind-down on tapering, that being the preferred alternative.


In sub-Saharan Africa, Ghana has decided to raise the lending rate to 14.5% for the first time in five years as inflation transcended the single-digit inflation rate in September 10.9% and worsened in October to 11%. According to Ghanaian officials, the decision to hike the rate would help contain rising inflation and help to reposition the west African economy for portfolio investment. In its case, the South African Reserve Bank (SARB) decided to raise rates by 25bp to 3.75% after the 2021 CPI forecast went as high as 4.5%. Analysts have noted that rising yields in the US and other advanced economies could reverse capital flows from emerging economies, a situation capable of creating a two-track growth trajectory for the global economy. However, the CBN governor argued that capital inflows into the Nigerian economy have typically not been tied to the relative size of returns. As such, there is no real reason to fret.


The Fear of Capital Reversal: Real or Imagined?

The CBN's decision to hold policy parameters despite the imminent rise in the rates elsewhere is premised on the belief that the country has all along not benefitted from the low-interest rate regimes that have prevailed in many advanced economies which has made investors search out higher interest rate environments in emerging markets. While this may hold true in principle and maybe in the case of South Africa, the same can not be said about Nigeria. Using quarterly data between 2013 and H1-2021, Proshare Analyst carried out a multiple regression analysis and found that while portfolio investment responded negatively to  rising parallel premium in the foreign exchange market, no significant causal relationship could be established between imported portfolio investment and the MPR or with the yields on the three-month treasury bills of the US and Nigeria. Specifically, portfolio investment drops by 1.56% for each naira difference between the official and parallel market rates.


The need for uniformity of rates in the foreign exchange market is demonstrated by the fall in Portfolio Investment (PFI) between Q2 2015 and Q3 2017 when the parallel market premium was raised (See Chart 2 below).


Chart 2: Relationship between Portfolio Investment and the size of the Parallel Premium

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Source: CBN, NBS, Proshare Research


CBN's Intervention Programs; the Search for A Scorecard

At the post-meeting briefing, the committee chairman noted that the Committee evaluated the impact of the several interventions of the CBN; however, it failed to show how these interventions impact the various sectors.  A proper impact audit should be conducted given the volume of its interventions supervised by the CBN in manufacturing/industries, agriculture, energy/infrastructure, healthcare, and Micro, Small, and Medium Enterprises (MSME).

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On developments around FBNH and the Banking Sector

The Committee also noted improvements in the banking system because the CBN has recorded loan-to-deposit ratio (LDR) gains while fielding journalists questions about the systematic suspension extended to the bank and bank customers, which expires in February 2022. Governor Emefiele noted with satisfaction the improvement in the banking sector, especially the appreciation in the share price of FBNH- an institution he referred to as being systematically significant. On the debate around the acquisition of controlling interest in the Holdco by Femi Otedola and Oye Odukale at FBNH, the CBN Governor noted that the SEC was the regulatory authority in a position to guide on the issue but judging by the sheer size of the bank, a single shareholder could not claim to be the owner of the bank.

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Related Links

1. July 2021 MPC Meeting: CBN Holds All Policy Parameters, Stops Sales of FX to BDCs - Jul 27, 2021

2CBN Suspends FX Sales to BDCs Until Further Notice  - Mar 26, 2020

3CBN FX Sales ban to BDCs: financial and market players react - Jan 12, 2016


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