MPC: Far From a Needle Shift

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Thursday, April 05, 2018 /01:40 PM/Proshare  Research 

Introduction

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)
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Source: UNDP (human development report)
 

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 suasion.
 

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 world.  


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What Has Changed?
 

Prices Consumer 
 
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
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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 market. 

Fig 2:  NTB and Monetary Policy Rate from 2016 to 2017
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Source: CBN
 

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. 

Fig 3: Call and OBB Rate from Dec 2017 to March 2018
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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. 

Fig 4: Net Foreign Asset of Deposit Money Banks 
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Source: CBN
 

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
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Source
: CBN 

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. 


Conclusion 
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 2007. 
 

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.
 

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