29 July 2014, Lagos – A combination of rising foreign exchange reserves and the attendant expansion of the nation’s fiscal buffers informed the decision of the Monetary Policy Committee of the Central Bank of Nigeria, CBN, to retain existing monetary policy rates at its meeting last week as the apex bank promised to monitor the twin issue of sustained marginal increase in inflation rate and growing liquidity in the system.
With inflation rate trending marginally upward for four consecutive months, the Monetary Policy Committee of the Central Bank of Nigeria had justification for the retention of the existing monetary policy rates at its 239th meeting last week, the first to be presided over by Mr. Godwin Emefiele since he assumed office on June 3. The committee decided to keep all the rates on hold as has been the case in the last two years although Emefiele restated his desire to trim borrowing costs over the next five years.
The Decisions Accordingly, the corridor for borrowing from or lending to the bank remained 200 bps plus or minus that rate. The liquidity ratio was retained at 30 per cent. The private sector cash reserve requirement (CRR) was retained at 15 per cent, while the private sector CRR was kept at 75 per cent.
The CBN noted that developments in the aggregate price level suggest an underlying inflationary pressure since January 2014 as the year-on-year headline inflation steadily inched up marginally from 7.9 per cent in April to 8.0 per cent in May 2014 and further to 8.2 per cent in June. The up-tick in June was, however, largely attributed to the rise in food inflation which rose from 9.7 per cent in May 2014 to 9.8 per cent in June while core inflation, on the other hand, rose from 7.7 per cent in May 2014 to 8.1 per cent in June. The Committee noted that all measures of inflation have witnessed progressive upward trend since February 2014 and agreed that this trend should be monitored closely to achieve a reversal.
Forex Market Emefiele noted that all the segments of the foreign exchange market witnessed a considerable degree of stability during the period. For instance, the exchange rate at the retail-Dutch Auction Segment (rDAS) of the market was flat at N157.29/$ in the review period. “At the inter-bank market, the selling rate opened at N162.20/$ and closed at N162.95, representing a depreciation of N0.75 or 0.46 per cent. Conversely, at the BDC segment, the exchange rate opened at N167.00/$ and closed at N168.00/$, representing a depreciation of N1.00 or 0.6 per cent.
“Gross official reserves rose to $40.20 billion by July 18 from $37.31 billion at end-June 2014. The increase in reserves was mainly due to increased accretion and moderation in the rate of depletion,” the apex bank governor disclosed.
However, Standard Chartered Bank’s Head of Africa Research and a well-known commentator on African markets, Razia Khan, believes that the recovery in foreign reserves is very recent, and in all likelihood related to an upsurge in inflows into Nigeria, which may not be sustained. She said: “While the rebuilding of buffers with slightly higher reserves is good news, the test lies in whether this positive performance can be sustained. Do reserves typically rise substantially throughout election periods?”
Taming Excess Liquidity Although the apex bank governor has expressed the determination of the monetary authorities to rise to the occasion should liquidity pressure escalate, financial analysts said it will be a serious challenge for the CBN to do so especially in a situation where the banking system is expecting the maturity of the Asset Management Corporation of Nigeria (AMCON) bond totaling N1 trillion in October coupled with the spending associated with political primaries in the country.
According to Khan, “For the markets, this raises key questions around how the CBN might react when liquidity pressures are even more pronounced than they are now. An additional AMCON maturity of just less than N1trillion is expected in October. The political primary season and pre-election spending are likely to build in intensity from September on.” When asked to be specific on the impact of liquidity situation in the economy, Khan said that market conditions are already liquid. “In all likelihood, as we approach the start of the political primaries, and with the additional pressures related to the maturing of AMCON bonds in October, conditions will become more liquid still. So far the CBN has said that it is ‘monitoring’ conditions, but outside of talk about eventual post-election easing, has not formulated any definite policy responses.
“We believe that policy could well be put to the test later this year, perhaps even requiring modest tightening, in order to stabilise markets. This is especially the case if we should see any volatility related to Fed announcements on policy normalisation at the same time,” she said. She believed that for now, the foreign exchange rate is stable, reflecting continued inflows into Nigeria. The analyst said the macro-prudential measures announced by the CBN and the increased capital requirement for BDCs should help at the margin, pointing out however that global factors will also be key – with much pointing to a confluence of greater pressures in Q4 2014.
The Standard Chartered chief said while the long-term goal may well be lower rates to boost private sector credit, to achieve some level of policy accommodation in order to ‘support’ the real economy, the way in which the CBN chooses to navigate upcoming challenges will be carefully monitored. “Maintaining faith in the stability of the FX rate, even in the face of these challenges, in an environment of low T-bill yields, will be key,” she said.
Low Interest Rates On whether the retention of the existing rates has anything to do with the resolve of the CBN governor to maintain low interest rates in the foreseeable future, Khan said, “We will have a better idea once we see the individual statements of MPC members. “How many hawks remain? Has their thinking about the balance of risks been meaningfully altered? We should not forget, that although the FX rate is stable, on the interbank market it continues to trade outside of the CBN’s official band. Does this mean more tightening is needed, or is a dovish bias already evident? Ultimately, with the governor talking about the eventual need for lower interest rates, the bar may be set even higher on further tightening, even when it is likely to be needed,” she said.
On the implication of the MPC’s decisions on ordinary Nigerians, the economist said there was little near-term implication, saying “We should not forget however, that a firm commitment to price stability – and the readiness to tighten when required – are the factors that will ultimately establish the credibility of policy and bring about lower lending rates in the long-term.
“People have to believe that they are in a low inflation environment and that low inflation will be safeguarded with all the available tools, for them to incorporate that into their pricing behaviour. Unfortunately, there are few tried and tested shortcuts to lower interest rates. It takes a great deal of work to establish anti-inflation credibility, but once attained, the whole economy will benefit from lower spreads, cheaper credit, more lending, and more economic activity.” Another analysts engaged on the outcome of the MPC meeting by THISDAY was Head of Research and Intelligence, BGL Plc, Mr. Olufemi Ademola believes the relative stability in key indicators, especially at the foreign exchange market, support the decision of the MPC. In his opinion, while there is no doubt that the anticipated huge spending and the maturing AMCON debt would increase liquidity levels in the economy, this is not expected immediately; hence there are rooms for more observations before other decisions would be taken at future MPC meetings.
Pro-growth Stance He said, “The pro-growth stance of the new CBN governor means that while the liquidity situation prevents an immediate rate reversal at the last meeting, he was also not about to start additional tightening so quickly until it becomes imperative. What can happen in the meantime is to continue to persuade the banks to increase lending, especially to the productive sectors in order to find productive use for the liquidity. This could ease the tension on the structural-based inflation and channel the excess liquidity away from the financial system.”
Ademola believes that the increase in international oil prices should be to Nigeria’s advantage, explaining that baring continuous fiscal leakages, higher oil prices should lead to increase foreign exchange earnings for the country and accretion to foreign reserves which supports the naira and prevents capital reversals and undesirable speculations on the naira. According to him, based on his pro-growth ideology, the CBN governor would be happy to see lower interest rates even as from this meeting.
“However, as a responsible economic manager, he is also aware that the current situations and outlook do not support that expectation. In addition, the anticipated increase in liquidity levels and inflation combined with a stable exchange rate may not present a gloomy scenario; at least not for now. Therefore, the decision to hold existing rates appear to be a win-win situation for Mr. Emefiele’s policy stance and the current situation and outlook,” Ademola said.
*Festus Akanbi – Thisday