– 

THE Monetary Policy Committee, MPC, on Tuesday decided to the interest rate at 14 percent while the cash reserve ratio, CRR, rate is still 22.5 percent.

The MPC took the decision after considering the headwinds in the domestic economy and the uncertainties in the global environment. Nine out of 10 members of the MPC decided to retain the MPR alongside all other policy parameters. One member voted to raise the MPR.

The MPC also retain the Liquidity Ratio at 30 per cent; and retain the asymmetric corridor at +200 and -500 basis points around the MPR.

Godwin I. Emefiele, governor, Central Bank of Nigeria in a statement made available to Realnews said the Committee re-evaluated the implications for Nigeria of the continuing global uncertainties as reflected in the unfolding protectionist posture of the United States and some European countries; sustenance of the OPEC-Russian agreement to cut oil production beyond July 2017; sluggish global recovery and the strengthening U.S. dollar.

The Committee also evaluated other challenges confronting the domestic economy and the opportunities for achieving price stability, conducive to growth in 2017. In particular, the Committee noted the persisting inflationary pressures; continuing output contraction; high unemployment rate; elevated demand pressure in the foreign exchange market; low credit to the real sector and weakening financial system indicators, amongst others.

Nonetheless, members welcomed the improved implementation of the foreign exchange policy that resulted in naira’s recent appreciation. Similarly, the Committee expressed satisfaction on the release of the Economic Recovery and Growth Plan, and urged its speedy implementation with clear timelines and deliverables.  On the strength of these developments, the Committee felt inclined to maintain a hold on all policy parameters.

Nevertheless, the Committee noted the arguments for tightening policy which remained strong and persuasive. These include: the real policy rate which remains negative, upper reference band for inflation remains substantially breached and elevated demand pressure in the foreign exchange market. The reality of sustained pressures on prices (consumer prices and the naira exchange rate) cannot be ignored, given the Bank’s primary mandate of price stability.

It noted that the moderation in inflation in February was due to base effect as other parameters, particularly; month-on-month consumer price index, CPI, continued to rise.  However, tightening at this time would portray the Bank as being insensitive to growth. Also, the deposit money banks may easily reprice their assets which would undermine financial stability. Besides, the committee noted the need to create binding restrictions on growth in narrow money and structural liquidity and the imperative of macroeconomic stability to achieving price stability conducive to growth.

The committee also considered the arguments for loosening the stance of monetary policy, noting its desirability in stimulating aggregate demand if credit increased with lower rates of interest. It noted the arguments that loose monetary policy was capable of delivering cheaper credit, making it more attractive for Nigerians to acquire assets, thus increasing wealth and stimulating aggregate spending and confidence by economic agents, which would eventually lead to lower Non-performing loans in the system. However, the counterfactual arguments against loosening was anchored on the upward trending month-on-month inflation and its impact on the exchange rate. Loosening would thus worsen the already negative real interest rate, widen the interest rate spread and reverse the positive outlook for the current account position.

On outlook for financial stability, the committee noted that the banking sector was becoming less resilient as a result of the adverse macroeconomic environment. Nevertheless, the MPC reiterated its resolve to continue to pursue financial system stability. To this end, the committee enjoined the management of the Bank to work with DMBs to promptly address rising NPLs, declining asset quality, credit concentration and high foreign exchange exposures.

The committee also noted the benefits of loosening at this time which will be in line with the needs of fiscal policy to restart growth. The MPC, however, noted that loosening would exacerbate inflationary pressures, worsen the exchange rate and further pull the real interest rate into negative territory. Since interest rates are sticky downwards, loosening may not necessarily transmit into lower retail lending rates.

The committee noted the consecutive positive contribution of agriculture to GDP in Q4 2016, a development partly traceable to the Bank’s interventions in the sector. The Committee remains optimistic that, if properly implemented, the newly released Economic Recovery and Growth Plan, ERGP, coupled with innovative, growth-stimulating sectoral policies would help fast track economic recovery.

—  Mar 21, 2017 @ 19:20 GMT

|