June 26, 2020 / 11:53
AM / by FBNQuest Research / Header Image Credit: BusineesDay
The consensus view (including our own) ahead of the meeting of the monetary policy committee (MPC) in late May was that it would settle for no change in stance, both out of habit and due to reservations over the effectiveness of rate changes. From members' personal statements we can now see that they acted out of "received wisdom" and voted for the cut as the "optimal response" to imminent recession. Price stability was part of the CBN's mission, indeed foremost according to one member, yet they felt they had to respond to rising unemployment and poverty.
We sense that members were acutely aware of the decisions taken by their counterparts elsewhere. A CBN survey tracks 14 central banks/MPCs and found that 12 had made at least one rate cut in recent months. The remaining two (Bank of Japan and the ECB) had little room for manoeuvre with benchmark rates at zero or below. One member observed approvingly that banks had eased in both advanced economies, where inflation was generally slowing, and in emerging economies, where it was gathering momentum.
A number of members commented on the good health of the banking industry, with three citing the improvement in the ratio for NPLs from 11.0% in April 2019 to 6.6% in April 2020.
We learn that as at end-May banks had submitted requests to restructure 32,000 loans in the light of the virus, equivalent to 33% of the industry's total loan portfolio. The impact would be modest in the member's view due to the regulatory measures implemented such as the granting of forbearance.
On the fiscal side we found a figure of N1.39trn for the FGN's deficit in Q1 2020, of which N560bn was covered by domestic bond sales by the Debt Management Office (DMO) and the balance was unfunded (ie an addition to its overdraft with the CBN).
Several members noted the weakness of the fiscal buffers. One made a punchy call for the merging of the excess crude account (which has no legal backing) with the sovereign wealth fund (which is established in law). In an appeal dear to our heart for preparedness for the next oil price collapse, he noted that an amendment to the constitution may be required and that the state houses of assembly had to develop the political will for the sea-change.
There is little mention of fx. One member opined that the cash reserve requirement (CRR) ratio was "adequate to counteract superfluous fx market demand", which provides context for last week's debit of banks by the CBN.
In March the committee voted unanimously for no change whereas in May the majority went for a rate cut of 100bps (and the others for additional easing). Our hunch at this point is that the committee will repeat its decision, although probably with a smaller rate cut, when its next meets.