MPC Meeting: Temporary Price Stability; Justification for a Cut in Rates?


Friday, March 22, 2019 / 06:58 PM / FSDH


Recent data on inflation rate, exchange rate and interest rate on fixed income securities in Nigeria have shown temporary improvement. This may mean things are looking up in Nigeria. Therefore, the temporary stability in key indicators from January 2019 till 21 March 2019 may support an argument for monetary policy easing (reduction in interest rate and other measures that can push more money into the financial system). Adding to the debate supporting easing of monetary policy is the fact that the general election is now behind us, so the negative impact of electioneering spending on price stability and associated uncertainties surrounding the election may be over. However, FSDH Research believes the short-term outlook of the Nigerian economy justifies a hold decision on policy rates at the current levels. 

FSDH Research believes the decision of monetary policy would be based on what will happen to price stability if there is an adjustment to the pump price of Petroleum Motor Spirit (PMS) and the electricity tariff sometime this year. Did you say,“oh no, the adjustments will not happen”. Sorry to disappoint you! These adjustments will surely happen, it is a question of when. You may recall that FSDH Research had discussed that after election, the economic managers and the politicians would face the realities to fix the pressure points in the economy to lay the foundation for sustainable growth. The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will hold its second meeting this year on Monday, 25 and Tuesday, 26 March 2019. At its meeting in January 2019, the MPC maintained the Monetary Policy Rate (MPR) at 14%, with the asymmetric corridor at +200 and -500 basis points around the MPR. It also retained the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) at 22.50% and 30% respectively. 

The global economy is slowing down. Major Central Banks in developed countries such as the US Federal Reserve System, European Central Bank (ECB) and Bank of England (BoE) have announced a delay in interest rate hike. Uncertainties surrounding Brexit and the US-China trade disagreements are the major issues weighing down the global economic outlook. Organisations such as the International Monetary Fund (IMF), World Bank and the Organization of Petroleum Exporting Countries (OPEC) have lowered their global economic growth forecasts. The implication of these developments is that the current increase in the crude oil market are not based on economic fundamentals but on US sanctions on Venezuela and OPEC production cuts. The US Energy Information Administration (EIA) forecasts an average price of Brent Crude of US$62.78/b in 2019, down from US$71.19/b in 2018. This lower oil price, given the OPEC production cut, signifies Nigeria may generate lower revenue in 2019 than in 2018. Hence, the need to maintain a tight monetary stance to attract investors into the Nigerian financial system. 

FSDH Research notes that the increase in the price of crude oil, the current position of the external reserves and the increase in Foreign Portfolio Investments (FPIs) have provided short-term stability for the value of the Naira. The yield on the 364-day Nigerian Treasury Bill (NTB), which was 17.65% in January 2019, dropped by 3.57% to 14.08% as at 20 March 2019. Again, don't get excited! It is very unlikely that foreign investors will be willing to buy NTBs below the current yields. Capital flight or a possible slowdown in inflows from FPIs may exert pressure at the foreign exchange market. Therefore, a rate cut that will reduce the yield on NTBs may not support the objective of a stable exchange rate. 

The inflation rate dropped to 11.31% in February 2019, in line with the forecast of FSDH Research, from 11.37% recorded in January 2019. Although the inflation rate is trending downward, the key limiting factors to the continued drop in the inflation rate are the need for adjustments to the current pricing regime of PMS and the electricity tariff. Any adjustment of these prices will result in a hike in the inflation rate. FSDH Research believes that with the inflation rate in double digits, as we project it to be by end-2019, may not justify a reduction in rates. 

Data from the CBN shows that the growth in credit to the private sector was below target. There is an argument that an increase in credit creation to the private sector could encourage business expansion and stimulate economic growth. However, this may not necessarily be the case under the current situation in Nigeria as other fiscal measures are required to improve the operating business environment. FSDH Research listed some of these policy options in its report entitled 'Economic Realities: Policy Options'. Looking at the short-term outlook of the economy, FSDH Research believes that members of the MPC will vote to maintain policy rates at the current levels.

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