Friday, September 23, 2016 6:55am / fdc
Fed, Bank of Ghana, CBN and South African Reserve Bank maintain status quo
The limitations of monetary policy tools in driving growth and reducing unemployment have dominated the ideological discourse amongst economists and central banks lately. The unison in keeping benchmark rates unchanged between some central banks especially the Fed, the Nigerian central bank, the South African reserve Bank and the Bank of Ghana confirms the fears of apex banks on the inadequacy of monetary policy to drive growth. The key considerations across board were growth, inflation and market interest rates. There seems to be a global convergence in the policy path towards using monetary policy to complement fiscal policy. We attempt to evaluate the contemporary issues confronting various central banks that made their monetary policy decisions recently.
In the US, the Federal Open Market Committee (FOMC) arrived at its decision to hold policy rates by considering the slower than expected growth, unemployment rates and inflation. Though US unemployment is at a level of 4.9%, much lower than the recession levels of 10.5% in 2008, there is still uncertainty about whether the economy is at full employment. The committee was concerned about the likelihood of the US slipping into a recession if interest rates were raised. Inflation in the US has also remained mild given the weak global economic conditions. These factors contributed to the FOMC’s decision to keep rates flat, increasing the probability of a rate hike in December. The Fed is unlikely to increase rates in November, close to the presidential election
Ghana maintained its benchmark interest rate at 26% p.a. This is as a result of three important developments. Following from their last meeting in July, headline inflationary trend is slowing and the cedi has stabilized. Projections of the fiscal consolidation and lower growth were factored into the decision to maintain benchmark rate at the current level. Nigeria also maintained its benchmark rate at 14% p.a. The Ghanaian government had its Eurobonds oversubscribed on September 8th, raising $750 million at a yield of 9.25%. This success is attributed to the Bank of Ghana’s commitment to honour its agreement with the IMF for the implementation of a $115 million credit scheme from the international agency. The IMF required that spending from the BOG accounts be prohibited ahead of December elections.
The South African Reserve Bank maintained its benchmark repo rate at 7%, mainly due to the easing of inflationary pressures. However, the country is still plagued with weak consumer confidence, unimpressive growth projections and struggling domestic and foreign investment.
The Kenyan monetary policy rate was cut by 50bps to 10% p.a. The East African nation is projected to experience impressive growth of 5.9%. It currently has positive real returns with future inflationary trends slowing. However, an overvalued currency necessitated monetary policy adjustments.
Nigerian CBN errs on the side of caution
Exotix Partners described the CBN’s decision to hold benchmark rate as sensible. It stated that the decision to hold the MPR at 14% p.a. showed clarity which could foster renewed confidence. The CBN acknowledged the urgency of addressing contracting growth, citing that fiscal reforms were insufficient to be successfully complemented by a decline in rates.
Nigeria is currently facing fiscal and external imbalances. On the fiscal aspect, Nigeria has earned approximately only 60% of its expected revenues. In order to finance its recurrent, debt and capital expenditure, the government needs to raise funds. Out of the 34% of the total planned expenditure for H1 2016 that has been spent, personnel expenses, debt servicing and capex have accounted for 42%, 28% and 12% respectively. This has made the Finance Minister and industrialists call for a lower MPR, thereby reducing Nigeria’s borrowing costs. The main beneficiaries of an increase in interest rates would be international investors (hot money flows).
However, the objective of the CBN does not incorporate fiscal policy reforms and as such its decision to keep the benchmark rate unchanged is to keep investors from exiting the country. Our external balance will deteriorate if investors exit due to unattractive rates.
Debating over the right direction of the MPR may be a narrow-minded approach to Nigeria’s economic problems. The government has to consider options that could help Nigeria raise extra funds required to cover its budget deficit and improve on external imbalances. Hence, increasing crude oil production and the sale of some state assets are feasible outlets for these objectives to be achieved. Both options would need an adroit handling given the precarious political environment.