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MPC: Demanding For More Macro Clarity or Playing the Oliver Twist?

Proshare

Wednesday, September 27, 2017 5:55PM / Proshare Research

As earlier expected the monetary policy committee came out of the statutory September meeting, leaving its Monetary Policy Rate (MPR) unshaved. Certainly in a long while, the monetary policy committee sounded confident.

The renewed confidence is as a result of the cycle rising above its first growth break in 24 years.   The economy grew for the first time in fifteen months by 0.55%, at the same time maintaining successive quarters of   decline in growth gap.


The committee seem less disturbed by the external economy, as sustained recovery in oil price has become more of a tail wind, providing ample room for the bank to bolster its external reserves.  The body language of the monetary policy committee affirmed glimpses of macro clarity but not enough to justify a shave in its monetary anchor, the Monetary Policy Rate (MPR). The Central bank seems to be demanding for more clarity, before tilting towards accommodation: Certainly playing the Oliver Twist.


Although the lords of the central bank admitted that the present rate of youth unemployment is alarming and proactive measures are needed. Regardless a paradigm shift towards growth threatens its correlated target.


Therefore retaining its monetary anchor at 14% and sustaining the bank’s intervention in the investors and exports window is premised on keeping its correlated targets of improved capital importation and price stability still   in play.


Evidently, falling in line with our position as stated in the editor’s note of Friday 22 und September 2017, which stated  that the Central bank will be comfortable sticking to the time consistency rule, where its long term objective remain its “only” policy goal.


After all the banks guidance of 15% inflation hasn’t been reached nor has the present path of expected inflation provided the bank the needed assurance to shave its monetary policy rate. Once again we are not close to kill.


What Else Has Changed?


Rates

Fig 1: Average and lending rates

Year

Average deposit

Maximum lending

Spread

2010

3.9

21.85

17.95

2011

5.7

23.2

17.5

2012

7.7

25.1

17.4

2013

6.6

24.9

18.3

2014

8.4

25.8

17.4

2015

6.1

27

20.9

2016

7.8

28.3

20.5

Mar-17

8.5

29.4

20.9

July-2017

8.65

30.75

22.1

Source: CBN, Proshare Research

The spread between average deposit rate and lending rate stood at 22.1 % as at July, widening the spread between the average deposit and the maximum lending rate by 1.2%. Obviously deposit money banks are increasingly hedging themselves against the growing cost of doing business.  

At the same time substantial chunk of negative beta experienced by firms stem from hedging against push factors by banks. The casualty effect so far, is that lending rates have become increasingly responsive to push factors. There danger of having the natural rate disconnected from the lending rate is vivid.    


Price Stability
Inflation has maintained moderation, as it fell from 16.05% in July 2017 t0 16.01% in August 2017. Food inflation fell slightly   from 20.28% in the month of July to 20.25% in the month of August, experiencing its first moderation in 3 months. 

Data available over a 15 month period shows that changes in inflation has a correlation of 0.37 with the spread that exists between the 10 year bond and 3 month paper.  

Empirically showing, there is some degree of impact on the spread, due to slight moderation in inflation. Further sustained decline with higher deceleration in inflation will certainly depress the spread inwards.  

At the same time the monetary policy rate is limited in the face of mounting cost push factors inherent with substantial deficiency in aggregate supply. In most circumstance, when monetary authorities use the rate channel to combat cost push inflation. 

They end up treating symptoms rather than providing the cure (Siscu, Modensi). Eventually the high monetary policy rate ends up being a needless weight on the economy. 

Fig 3: Spread between 10 year and 3 month underlying asset


Source; FMDQ, CBN, Proshare Research  

Monetary Aggregates: Fire fighting
Demand deposit rose from Naira 8.88 trillion in the month of June 2017 to Naira 8.41 trillion in the month of July, reflective of 5.58% increase in demand deposit compare to the previous month (Fig 4).  It is expected that improved oil earnings will bolster demand deposit in subsequent periods.  

Narrow money rose from   Naira 9.88 trillion in the month of June 2017 to Naira 10.33 trillion in the month July of 2017, which is reflective of a 4.55% growth compare to the previous month. The rise in Narrow money was largely driven by 5.58% increase in demand deposit, also offsetting the erosion suffered in currency in circulation. 

On the other hand broad money rose from Naira 21.67 trillion in June to Naira 22.20 trillion in July 2017, reflective of a 2.4% increase compare to the previous month but below the Central bank’s targeted growth.  

Obviously there is a conflict between the banks policy goal of stoking inflation and its intermediate target with regards a monetary supply growth of 10.29%. Although the domineering posture of the fiscal policy is a source of concern, regardless the bank’s fire fighting approach towards monetary aggregate is largely short term driven.  

Fig 4: Demand deposit from August 2016 to July 2017

Source: CBN, Proshare  

Exchange Rate Stability 

Fig 5:  Foreign exchange Turnover

Source; FNDQ, Proshare Research  

The introduction of the Investors and Export window has greased the market with needed dollar liquidity. The total value of trade carried out in the investors and export window as at inception to July stood at $4.8 billion. The channel has ensured a massive thinning down in the spread between the official window and the bureau de change (fig 5). 

Evidently the window has reduced the likely hood of experiencing currency over run, which has also come at the cost of slower growth in external reserves. Certainly the increase in oil receipts will provide more manoeuvring space for the bank to sustain its intervention in the foreign exchange market.


Conclusion 
It is no longer news that the Central bank disdains the idea of an    inflation surprise; even though the bank claims it is willing to be flexible along the line.  

The idea of shutting the door against possible policy recalibration till the end of the first quarter of 2018, in the face of high unemployment, low output, high misery index and low productivity raises eyebrows.  Quantitative variables such as output and production manufacturing indexes have begun are shooting green.  

On the other hand, qualitative variables such as the GNI still remain a distant off from a pick up. The ability to return fully to earlier episodes of growth spell also hangs on monetary policy tilting towards accommodation.
              



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