Despite Concerns over Food Inflation, Analysts Justify MPC’s Tight Monetary Stance
Following the decision of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to retain the base interest rate at 14 per cent, for the umpteenth time, economists and money market experts have responded. Though, the decision was in line with their expectations, they expressed reservation about the level of food inflation, which is still high. They justified CBN’s decision to maintain the hard stance, given the impact of activities in the lead-up to the forthcoming general elections on monetary policy, the analysts expressed concern that food inflation was still above the threshold.
The April meeting was the first time this year that the MPC met, after it eventually formed a quorum to legally meet and take monetary policy decisions.
Defending the decision of the MPC to hold the monetary policy rate (MPR) at 14 per cent in the last 18 months, with other variables also remaining fixed, CBN Governor Godwin Emefiele said, “On the argument to hold, the committee believes that key macroeconomic variables have continued to evolve in a positive direction in line with the current stance of macroeconomic policy and should be allowed more time to fully manifest.”
Another argument pushed by MPC was that further tightening would strengthen the impact of monetary policy on inflation, with complementary positive effects on capital flows and exchange rate stability. But Emefiele and his team at the MPC are not unaware that their decision to hold interest rate at its present level could serve as disincentive to economic growth. “Nevertheless, it could potentially dampen the positive outlook for growth and financial stability. However, the committee is of the view that loosening would strengthen the outlook for growth by stimulating domestic aggregate demand through reduced cost of borrowing.”
The MPC resolved to maintain its hard stance because, according to it, relaxing the MPR and other variables could lead to a rise in consumer prices, generating exchange rate pressures on the currency in the process. The committee also believed that loosening could worsen the current account balance through increased importation.
A Lagos-based economist, Dr. Boniface Chizea, could not agree less with the MPC. Chizea said, “I thought that was on the cards. As the saying goes, if it is not broken why mend it. We have witnessed steady recovery of the economy from growth in notional GDP to persistent downward decline in the rate of inflation for about 12 months now. And as policymakers, the likely inclination would be not to rock the boat.”
Chizea argued that the widespread expectation of Nigerians, especially those in the productive sectors of the economy to see rates cut was not realistic at the present time. “Now the expectations of most economic agents is to see some action in the direction of reduction of the base interest rate; the Minimum Rediscount Rate (MRR), which has been sticky at 14 per cent, despite the nudging by the fiscal authorities for an indicative notional reduction, as it is argued, to make cost of funds cheaper to boost the appetite of small and medium scale enterprises, the acknowledged engine that has the potential to catalyse rapid growth in economic activities for increased demand for credit. But the fly in the ointment is that inflation rate, though we have witnessed a decline, is still above the rate of inflation, which the last time I tracked was at 14.3 per cent,” he stated.
To Chizea, reduction in MRR at the moment would be a clear disincentive to the informed corporate treasurer in terms of patronising bank deposit facility at the risk of paying an inflation tax. Such development would worsen the liquidity in circulation outside the banking system and blunt the effectiveness of monetary policy instruments, he said.
On his own part, a lecturer at the Department of Economics, Lagos Business School (LBS), Dr. Bongo Adi, said the decision of the MPC to hold MPR at 14 per cent in the last 18 months was due to government’s high deficit and the need to repay its huge debt.
Nevertheless, Adi believes it is high time the MPC changed its stance to help boost economic activities, as government revenue profile has improved in the last few months with the economy’s recovery from recession. “It is expected that by now rate should be relaxed to drive the real sector,” he said. “But what l can see that made the MPC to continue to hold MPR at 14 per cent is fear. The CBN is afraid that the forthcoming general elections will fuel inflation.”
However, Head Research, SCM Capital, Mr. Sewa Wusu, said the MPC’s decision to retain all the monetary variables at current levels was in line with expectations. “The fact that all macroeconomic indications are supporting recovery gave the committee the leeway to hold rates.”
But Wusu said the onus was now on the government to make more policy pronouncements to further support growth. He noted that though inflation had witnessed a reduction, it was still on the high side when compared to the target threshold.
“My view is that the MPC considers the current anchor rate as tight enough to combat the pressures emanating from prices, particularly as election spending cycle kicks in. That said, the decision to hold the rate was just in line with expectation,” Wusu stated.
Likewise, CEO, The CFG Advisory Limited, Adetilewa Adebajo, said the decision was “not unexpected from a new team trying to find its feet.”