By Babajide Komolafe

The consensus in the financial markets is that while the Committee at its meeting this week may again raise the bench mark interest rate to further tighten money supply, there is however no need for further tightening.

In an aggressive move to curb inflationary pressures, the MPC at an extra ordinary meeting on October 10th increased the cost of borrowing in order to tighten money supply. It raised the   benchmark interest rate, the Monetary Policy Rate (MPR), by 275 basis points to 12 per cent. It also raised the cash reserve requirement (CRR) for banks by 400 basis points to 8.0 per cent.

The inflation rate for October however defied these measures. Data released by  the National Bureau of Statistics (NBS)  last week showed that inflation rose to 10.5 per cent from  10.3 per cent in September. Though a marginal increase, it was however for the second consecutive month.

The CBN Governor, Mallam Lamido Sanusi, though attributed the inflation increase to time lag, he however said that monetary policy will remain tight. “Monetary policy is now tight and will remain so,” he said in an interview with Bloomberg, thus indicating possibility of another MPR hike.

Economic and financial experts however said that monetary policy may remain tight but there is no reason for further tightening.

Razia Khan of Standard Chartered  said that though the  further increase in inflation rate is a concern, there is no need for further tightening. “The inflation data is more of a concern, with the uptrend in year-on-year  inflation continuing, she said in email response. “Inflation is up only slightly – not hugely – and past performance is not necessarily the best gauge of the future.  There is likely to be some lag at work between monetary tightening and the impact on the real economy.  It’s still not a given, given evidence of tight market liquidity, that we will need to see an additional policy rate hike at the very next CBN MPC meeting.

“There is always a chance of course that they might tighten.  But we don’t see why it has to happen next week, given that market liquidity is still relatively tight”.

Speaking further in a statement titled, We see MPC on hold at 12 per cent”, she said, “With CBN comments suggesting that they are encouraged by the more conservative fiscal stance likely to be adopted by government  (the benchmark rate for oil in the 2012 budget is likely to be reduced to USD 70 per barrel  from USSD 75 per barrel l), there would appear to be fewer reasons to tighten policy, at least until the Budget for 2012 is formally published, and spending pressures gauged.  Global economic risks should not be ignored either, with survey data now pointing to a euro area recession in Q4 11 and Q1 12, and emerging market demand slowing.

But perhaps most significantly, the CBN has already announced that it will allow for a move to a new, higher USD-NGN mid-rate at the bi-weekly official forex auctions, precluding the need for imminent monetary policy tightening.  While monetary policy will continue to be tight – with Open Market Operations likely to continue in the interim, details of the planned lifting of fuel subsidies in the budget may well be needed before we see more policy tightening from the CBN.  Real interest rates are now positive – The CBN can afford a pause in its tightening cycle”

According to Dr. Omolara A, an economic expert, “The MPC should not raise the  rate because market expectation is that the monetary policy rate  increase will not be in the  right direction,  more so when we have contraction in GDP growth.

She explained, “October inflation was above market expectations, reducing scope for interest rate cuts in near term, but it is still marginal (0.03) to warrant rate increase at the next MPC meeting. Trade surplus seems improved arising from exports of non oil. However capital outflow is not going to abate considering the  strength of the country’s balance of payments and, consequently, the performance of the exchange rate. The private capital outflows are highly correlated with oil prices.”

Explaining why it would not be expedient to further tighten monetary policy, the Head of a bank’s foreign exchange desk, who doesn’t want to be named said, “I expect that MPC will raise the policy rate again at least by 50 bases points to 12.5 per cent to check the inflationary trend. However, the other issue is that now that they have made up their mind to devalue the Naira, it will be harsh to announce devaluation and jack up interest rate at the same time. It will be a very difficult decision to make if you ask me.”