MPC: Behind the Curve, Playing Catch Up

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Tuesday, November 24, 2015 08.24 PM / By Temitope Oshikoya**

With employment so far from its maximum level and with inflation running below the Committee’s 2 percent objective, I believe it’s appropriate for progress in the labor market to take center stage in the conduct of monetary policy……In current circumstances, forward guidance can lower private sector expectations regarding the future path of short-term rates……leading to more accommodative financial conditions.” Janet Yellen, now Chairman of U.S. Federal Reserves, in a speech on Challenges of Monetary Policy, dated March 4, 2013.

This statement was the opening quote to an article with the title “Monetary Policy Committee (MPC) at Cross-roads” by this writer in the Guardian in November, 2014. The article argues that forward guidance for short to medium term by the Central Bank of Nigeria (CBN) should aim at loosening rather than further tightening of monetary policy.  

The article further warned that with the high rate of unemployment and jobless growth, it is safe to state that the economy is already below its potential output growth; and added to it are the potential recessionary gaps from realized and emerging shocks. With negative supply and oil price shocks, trying to aggressively maintain an inflation target could restrain output growth and worsen the unemployment situation. 

It also argued that there was no need for elevated policy action on the interest rate in the short term as the marginal social benefits of reducing unemployment from a high of 24 percent outweigh the marginal social cost of inflation. Shifting to a further tightening cycle, with an already elevated and tight monetary policy at that point in time, is neither supported by the country’s economic data, the proper dimension of the emerging domestic and foreign shocks to the economy, nor by proponents of economic theories from the two mainstreams of macroeconomics. 

That was one year ago! The Fiscal Authority was in denial at the time, while the MPC increased its monetary policy rate from 12% to 13% and used the CRR in an erratic manner. Recent data on inflation, output growth and unemployment now support that thesis. The Nigerian economy has since been buffeted by slow growth in the face of high unemployment and rising cost of living.

Output growth rate has declined more sharply, with economic growth rate, according to NBS, slowing to 2.4% Q2 of 2015, with a marginal increase to 2.84% in Q3 of 2015 compared to nearly 4.0% in first quarter of 2015, and 6.2% in fourth quarter of 2014. Non-oil GDP growth has continued to slow down.

Unemployment rate already sped up to 9.9% bringing newly unemployed people to about 1.5 million since Buhari’s administration. The combined unemployment and underemployment rate rose to over 27% from 24% last year, while inflation rates appear to be stalling at 9.3%, and liquidity trap of about 700 million naira is trapped within the banking system.

In another article, “Perfect Storm, Time to Ease UP” in Business day in September, 2015, it was argued that the MPC, at its September 2015 meeting, should start bringing down significantly the MPR (13%), CRR (31%), and liquidity ratio (30%). It is sincerely hope that the Central Bank and its MPC will not fall into the same trap of collective self-delusion of the speculative foreign portfolio traders and the erstwhile Fiscal Authority.

As earlier noted, failure to address the perfect storm of stagflation, high cost of borrowing and gross distortions of prosperity may accelerate the landing of the Tsunami that has hit the fiscal revenue generating agencies and oil sector institutions at the door step of the monetary and financial regulatory agencies.

The tasks of central bankers in respect of crafting and executing monetary policy have never been easy. However, the CBN’s tight monetary policy contributed in no small measures to the severe economic slowdown, rising unemployment, and high borrowing cost. Due to lags, monetary policy can take 6 to 12 months or more before having its full impacts on the economy.

Judging by the severity of the shocks and proper dimensions of its ramifications on the economy as this writer did a year ago, some of the steps including reducing the MPR and CRR, being taking by the MPC now should have been adopted, even if gradually and systematically, since fourth quarter of 2014 or first quarter of 2015. Nevertheless, its actions to selectively defrost credit to the productive sectors of the economy within a banking liquidity trap are welcome.

The task of the MPC, along with that of the fiscal authority, by looking forward with its policy reaction to emerging and anticipated shocks, is to prevent or at least ameliorate the impacts of the economic crash.

The MPC is driving with the rearview mirror and now reacting to an economic crash that has already occurred by reducing MPR from 13% to 11% and CRR from 25% to 20% at one sitting. A year after the initial warning, the MPC appears like it is now just coming out of a coma induced by somebody placing tranquilizers into their monetary champagne drinks.

As the perfect storm of 2015 begins to clear, there is already a silver lining for the economy in 2016. The MPC may be proving that it is not able to anticipate and properly dimension shocks to the economy and ensure appropriate monetary policy reaction function on a timely basis.

The MPC is quite behind the curve and now appears to be playing catch-up by accelerating on easing of the monetary policy gas cylinder!

**Dr. Temitope Oshikoya, an economist, is CEO of Nextnomics Advisory   


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