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CBN’s policy position and wider implications

By Emeka Anaeto, Economy Editor

THE Monetary Policy Committee, MPC, of the Central Bank of Nigeria, CBN, yesterday decided to maintain its contractionary monetary policy, amidst strong pressures for a reversal. It had instituted the policy in its July 26, 2016 meeting.


It was striking that the decision was unanimous vote by all the members.


The Committee decided to:   Retain the Monetary Policy Rate (MPR) at 14 per cent; Retain the asymmetric corridor around the MPR at +200/-500 basis points; Retain the Cash Reserve Ratio (CRR) at 22.5 per cent, and; Retain the Liquidity ratio at 30 per cent.

The decision was anchored on its assessment of the lingering weak global economy performance caused by weakening demand, sluggish growths and recessions in some economies. They placed huge emphasis on the domestic economic difficulties, such as downward pressure on oil earnings as well as the inflationary and recessionary pressures.

They desired to strike a balance between stimulating a return to economic growth and simultaneously contain rising inflation.

Restrictive policy stance

The Committee alluded to the fact that a reversal of its restrictive policy stance without coordinated fiscal policy thrusts that will support a corresponding increase in real output will further stoke inflationary pressure.

Despite the presence of cost-push inflationary pressure and the crowding out effect of high policy rate, it could be seen that the preference for foreign exchange stability and the need to maintain consistency in policy pronouncements informed the decision of the MPC. CBN shielded these intentions in its statements.

Although the potential upward pressure from volatility in the forex market still requires policy attention, many analysts however believe that a reversal of the current restrictive policy stance of the CBN may occur in the near term.

Analysts’ opinion is hinged upon the imperative need to stimulate growth, consistent month-on-month moderation in inflationary pressure across all measures of inflation and expected inflows from foreign borrowings.

Though the MPC decision appears broad in line with market expectation, and as such, no significant changes is expected in the financial markets, but there are some critical consequences across fiscal and monetary policy lines.

First, the sustained lower government earnings amidst the need to stimulate economic recovery through increased public spending would sustain the aggressive borrowing stance of the Federal Government, thus, keeping yields elevated in the fixed income market, while crowding out private sector in the money market. Ultimately interest rates would remain high.

In the forex market, although the restrictive policy stance of the CBN is partly aimed at sustaining stability in the market, the resolution of the insecurity challenges in the Niger Delta and restoration of confidence in the forex market remain critical to sustained exchange rate stability. Therefore it should be expected that the margin between the interbank and the parallel forex market segments would remain wide given the impact of low oil earnings and the restriction of some items from the official market segment.

It should also be expected that the performance of the equities market would remain subdued in the short term, given faltering macroeconomic fundamentals and expectations of weaker corporate performance.

Moreover, it should be expected that attractive yields in the fixed income market will continue to induce asset reallocation from equities, thereby foisting further bear run on the stock market. However, this may, over time, create entry opportunities in the equities market.


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