Monetary Policy Decision - Direct Hit or Own Goal?

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Wednesday, March 27, 2019 09:26 AM / Vetiva Research

 

In a surprising turn of events, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), in its second meeting of the year, voted by a majority of 6 out of 11 to cut the Monetary Policy Rate by 50bps to 13.50%, while keeping all other policy levers at previous levels. 

Interestingly, whilst Consensus predicted a HOLD, a rate cut was the favored option by 9 committee members, with 2 members voting for a 25bps cut and 1 voting for a 100bps cut. This is the first revision to the MPR since a 200bps rate hike in July 2016. 

The decision comes in the wake of policy normalization slowdown in developed economies – specifically the U.S. and European Union – which has led to a mild resurgence in FPI so far this year, as well as the recent decline in inflation, which was driven by a decline in core and food inflation.   

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A hasty decision based on short-term positives?

The committee once again struck a more optimistic tone, with the CBN Governor, Godwin Emefiele welcoming the improved economic indicators, noting the improvement in both manufacturing and non-manufacturing PMI as evidence of the continuing economic recovery. 

The decision was touted as a key measure to stimulate the economy by reducing the cost of borrowing. Whilst the decision will have an immediate impact on borrowing rates already benchmarked to the MPR, we are skeptical of a significant passthrough to the real sector as bank lending rates are notoriously sticky going down. 

Also, the decision seemingly ignores the looming risks to inflation – an expected increase in liquidity from the frontloading of a late 2019 budget, an increasingly likely review of the Multi-year tariff order (MYTO) which has an impact on electricity prices, and most importantly a looming 67% increase in national minimum wage – all of which are likely to push inflation north for the rest of the year. 

Notably, the CBN had previously been vocal about their concerns on the impact of the minimum wage increase on inflation. This change in direction could possibly be a signal that the committee now projects a milder impact on inflation than initially feared. That said, our view is that this decision is a hasty reaction to a short-term positivity in economic indicators, one which could exert pressure on price levels in the near-term.

 

Is this decision a distraction from the CBN’s primary objective?

Taking a view from recent history, where the MPC cut rates by 200bps in 2015, before subsequently reversing course within the space of a year, a rate HIKE might not be far off the cards, especially given the expected rise in inflation and the current fragile state of the economy.  

Overall, whilst the cut in rate is a signal from the MPC of a stronger pro-growth focus, we believe this decision is ultimately an own goal as the rate cut will do little to stimulate the economy and has the added disadvantage of distracting from its primary objective – price stability. 


 

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