May 29, 2020 /08:58 AM / by FBNQuest Research / Header Image
Credit: Lioness of Africa
The monetary policy committee (MPC) created a surprise yesterday by cutting the policy rate by 100bps to 12.50% on a majority vote (seven to three). The minority wanted additional easing, and so underlined the dramatic change in sentiment from the unanimous vote for an unchanged stance in March. The other policy parameters were unchanged. The communique noted that price stability remained the CBN's "primary mandate" yet expressed the "need for a balanced approach in supporting growth in the face of rising domestic prices".
Central banks and MPCs deliver signals for the market and the wider world. In this case, we highlight the statement that "a hold may indicate that the monetary authorities are insensitive to prevailing weak economic conditions:". Subject as always to the unspoken caveat about the limits to the passthrough to the real economy, the committee is looking for the cut to stimulate credit expansion.
The committee does not see any risk from the monetary data. It noted that marginal growth of 2.7% in broad money (M3) in April was far behind the indicative benchmark for the year of 13.1%. This thinking may provide the rationale for another rate cut in coming months.
The committee has plenty of advice for the FGN. Far from calling for austerity, it urges the government to maintain its core spending plans and to extend its efforts to boost tax collection, which would make the counter-cyclical fiscal stance more effective,
The domestic response to Covid-19 has been led by the CBN through its many credit interventions. Under the health sector intervention of N100bn it has released N10bn, and under the N1trn intervention targeted at agriculture and manufacturing it has approved N93bn in new loans. Further, it has cut the annual interest rate on all its facilities from 9% to 5%. The FGN's planned fiscal response has since been boosted by the US$3.4bn credit from the IMF.
The communique observed that total credit to the economy had increased by 20.5% or N3.1trn since the CBN had reinforced its loan-to-deposit ratio in July 2019. This represents healthy growth in credit extension. It is unclear if it includes the CBN's own interventions.
In the MPC's view the economy will have returned to growth by Q4 2020 and the outturn for the full year could well better the -3.4% contraction forecast by the IMF. It cited the measures taken to confront the spread of the virus and the improvement in crude oil prices.
Elsewhere the communique highlighted the pick-up on the local bourse since the first quarter. We should add that this recovery is due in part to the reinvestment of funds that offshore players have been unable to repatriate.