CBN retains rates, worries over elections spending, budget ...currency swap framework ready next week
Worried by expected high election spending and capital releases from the 2018 budget to be signed by President Muhammadu Buhari soon, the Central Bank of Nigeria has retained interest rate benchmark at 14 percent to mitigate the impact on inflation.
Rising from the Monetary Policy Committee (MPC) for May 2018, yesterday, CBN governor Godwin Emefiele said “the objective of the policy stance will be to accelerate the reduction in the rate of inflation to single digit, promote economic stability, boost investor confidence and promote foreign capital flows.”
The MPC held the monetary policy rate (MPR) at 14.0 per cent alongside all other policy parameters. Thus the credit reserve ratio (CRR) was also kept at 22.5 per cent; liquidity ratio at 30.0 per cent; and asymmetric corridor at +200 and -500 basis points around the MPR.
While briefing journalists, Mr. Emefiele said “the committee considered the forecast of high liquidity injection in the second half of 2018, upward pressure of prices driven largely by substantial expansion of fiscal policy which will arise from the late passage of the 2018 budget, outstanding balance from the 2017 budget and the pre-election expenditure.”
He said the MPC reckoned that “tightening would ensure the mop up of excess liquidity, mindful that despite the moderation in inflation, the current inflation rate is still above targeted single digit and that real interest rate only turned positive in the review period.”
“The objective of the policy stance therefore would be to accelerate the reduction in the rate of inflation to single digit, to promote economic stability, boost investor confidence and promote foreign capital flows with complimentary impact on exchange rate stability.
“Conversely, the committee believes that raising the interest rate would however depress consumption and increase the cost of borrowing to the real sector. Moreover, such policy will make Deposit Money banks to reprise their assets,” Mr. Emefiele explained to journalists.
Mix feelings over rates retention
Dr Mr Biodun Adedipe, Chief Consultant B. Adedipe Associates Limited in his reaction to the outcome of the MPC said: “If I were a member of the committee, I would have made the same argument and arrived at the same conclusion.
“What I see is an easing in the 3rd or 4th quarter, resting on the back of the fact that, this is a pre-election year. CBN will be challenged in mopping up liquidity at the same time trying to create an environment that is inviting for investors.”
Dr. Muda Yusuf, Director General, Lagos Chamber of Commerce and Industry in his reaction said: “I like to emphasise the point I made earlier. That this economy is first and foremost about investors in this economy and they need to be supported. I am happy about the point he made about coming up with innovative strategies on how to support the real sector.
“Any investor that is creating value needs to be supported. Let us see how it will go. If there are incentives to support the non-oil sector that will help to stimulate funding for the sector.”
Ayodeji Eboh, a financial expert, and Managing Director of Afrinvest Securities Limited said the MPC outcome is in line with expectation.
“We still need the FX liquidity in the short run while we try to grow the economy to generate export that will attract more forex in the long run,” he argued.
Country Head, Ecobank UK Representative Office and Head of Group Research, Ecobank, Gaimin Nonyane said: “We have already seen some body signals from the central bank not in the direct instrument of the monetary policy rate but with the indirect instrument of monetary policy.”