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The Central Bank of Nigeria raises interest from 12 percent to 14 percent to engender price stability and economic growth while urging the federal government to diversify the economy
By Maureen Chigbo
THE Monetary Policy Committee, MPC, of the Central Bank of Nigeria at the end of its two-day meeting voted to increase interest rates by 200 basis points from 12 percent to 14 per cent. It also retained the cash reserve ratio, CRR at 22.50 per cent; the Liquidity Ratio at 30 percent and the Asymmetric Window at +200 and -500 basis points around the interest rates.
The MPC took the decision on Tuesday, July 26, in Abuja, after reviewing the outlook of the gloomy global and national economy and recognised that the Central Bank of Nigeria lacked the instruments required to directly jumpstart growth in the country. Being mindful not to calibrate its instruments in such a manner as to undermine its primary mandate and financial system stability, in assessment of the relevant issues, the MPC opted for a balance of risks tilted against price stability.
Consequently, five members voted to raise the Monetary Policy Rate while three voted to hold.
The voting came after members of the MPC agreed that the economy was passing through a difficult phase, dealing with critical supply gaps and underscored the imperative of carefully navigating the policy space to engender growth and ensure price stability.
The MPC summarised the two policy options it was confronted with as restarting growth or fighting inflation. The MPC was particularly concerned that headline inflation spiked significantly in June 2016, approaching twice the size of the upper limit of the policy reference band.
The Committee noted that inflation had risen significantly, eroding real purchasing power of fixed income earners and dragging growth. The MPC was further concerned that while the situation called for obvious tightening of the monetary policy stance, the technical recession confronting the economy and the prospects of negative growth to year-end needed to be factored into the policy parameters.
The arguments in favour of growth were anchored on the premise that the current inflationary episode was largely structural. In particular, members noted the prominent role of cost factors arising from reform of the energy sector, leading to higher domestic fuel prices and electricity tariffs and prolonged foreign exchange shortages arising from falling oil prices leading to higher inputs costs, domestic fuel shortages, increased transportation costs, security challenges, reform of the foreign exchange market reflected in high exchange rate pass-through to domestic prices of imports.
Consequently, the Committee reasoned that the current episode of inflation, being largely non-monetary but largely structural, tightening at this point would only serve to worsen prospects for growth recovery as the Bank had in June 2016, withdrawn substantial domestic liquidity through the foreign exchange market upon introduction of the flexible foreign exchange regime.
Members, however, noted the negative effect of inflation on consumption and investment decisions and its defining impact on the efficiency of resource allocation and investment.
The MPC further noted the prolonged non-payment of salaries, a development which has affected aggregate demand and worsened growth prospects. It also noted that at the May MPC meeting, members weighed the risks of the balance of probabilities against growth and voted to hold, allowing fiscal policy some space to stimulate output with injections, but this has been long in coming.
The MPC also considered the high inflationary trend which has culminated into negative real interest rates in the economy; noting that this was discouraging to savings. Members also noted that the negative real interest rates did not support the recent flexible foreign exchange market as foreign investors attitude had remained lukewarm, showing unwillingness in bringing in new capital under the circumstance.
They further noted that there existed a substantial amount of international capital in negative yielding investments globally and Nigeria stood a chance of attracting such investments with sound macroeconomic policies.
Consequently, members were of the view that an upward adjustment in interest rates would strongly signal not only the bank’s commitment to price stability but also its desire to gradually achieve positive real interest rates. Such a decision, it was argued, gives impetus for improving the liquidity of the foreign exchange market and the urgent need to deepen the market to ensure self-sustainability. “Members were of the opinion that this would boost manufacturing and industrial output, thereby stimulating growth which is desired at this time,” the communique issued at the end of the meeting on Tuesday, July 26, which was made available to Realnews stated.
According to the communique, the Committee noted the rise in year-on-year headline inflation to 16.48 per cent in June 2016, from 15.58 per cent in May; 13.72 per cent in April, 12.77 per cent in March and 11.38 per cent in February 2016. The increase in headline inflation in June reflected increases in both food and core components of inflation. Core inflation rose sharply for the fourth time in a row to 16.22 per cent in June, from 15.05 percent in May; 13.35 per cent in April; 12.17 per cent in March; 11.00 per cent in February and 8.80 per cent in January having stayed at 8.70 per cent for three consecutive months through December, 2015.
Food inflation also rose to 15.30 percent in June, from 14.86 per cent in May; 13.19 per cent in April; 12.74 per cent in March; 11.35 per cent in February, 10.64 percent in January and 10.59 per cent in December 2015.
“The rising inflationary pressure was largely a reflection of structural factors, including high cost of electricity, high transport cost, high cost of inputs, low industrial activities as well as higher prices of both domestic and imported food products,” it said.
The MPC expressed strong support for the urgent diversification of the economy away from oil to manufacturing, agriculture and services and called on all stakeholders to increase investment in growth stimulating and high employment elasticity sectors of the economy in order to lift the economy out of its current phase.
– July 27, 2016 @ 10:10 GMT |
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