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Monetary Policy: Analysts caution MPC against hike in interest rate

By Babajide Komolafe

FINANCIAL market analysts have cautioned the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) against further increase in the Monetary Policy Rate (MPR) at the end of its meeting tomorrow.

They argue that while the further increase in inflation rate to 18.3 percent in October makes reduction in MPR unattractive, raising the benchmark interest rate would be ineffective in achieving the desired objective of attracting foreign investment into the country.

According to analysts at Financial Derivatives Company: “The deliberations from the MPC meeting is likely to waver from the consensus for a more accommodative monetary policy stance.

Inflationary pressures

This is because the increase in the monthly rate might be signalling a possible convergence in headline and monthly rate. Cutting rates might further increase inflationary pressures in the market. Therefore, the MPC is likely to maintain status quo on the benchmark rate.

“The other scenario would be to increase interest rates to curb inflationary pressures. However this would be an unwise decision in an environment with contracting growth. A lack of transparent policies as well as a strong presence of the CBN in the forex market is unlikely to boost forex inflows, a desired effect of higher interest rates.”

Making a similar projection analysts at Afrinvest stated: “Afrinvest Research believes that the committee will likely hold all rates constant whilst reinstating the need for the CBN’s hierarchy to properly implement the currency market reforms in order to regain waning credibility.

“We expect that the committee will maintain status quo as monetary policy has already reached its limit in stimulating investor confidence whilst focus has shifted to administrative measures preventing a fully functional FX market. A higher rate environment would neither spur private capital inflow nor would a lower rate policy incentivize banks to increase their risk appetite in the credit market.

The investment dilemma to foreign investors remains the current attractive yields in the market and the overhanging currency risks which might serve as a bottleneck in the repatriation of funds. We believe that the FX market needs to be “truly liberalized” not only in its operations but also in the demand and supply dynamics by rolling back capital control polices and reinstating transparent 2-way quoting system for FX.”

Speaking further on the need to review its foreign exchange policy, Afrinvest analysts warn: “Majority of the current challenges stem from the glitches in the operations of the FX market – which is mostly administrative since the MPC had sanctioned a move to a flexible regime at the May 2016 meeting.

We believe the operations of the FX market will be on the forefront of discussions at the MPC meeting as failure to manage the protracted currency crisis will lead to: Further divergence between the interbank and parallel market rates; A hike in the pump price of PMS and; Further pressure on general price levels which will ultimately defeat the monetary policy objective of price stability.”

Analysts at Meristem equally warned: “Although the perceived vulnerability of Emerging Market Economies to recent global developments may encourage a policy rate hike in order to make the country more attractive, we opine that such a move, especially at this time, may further impede economic growth. Also, given that the premises which were laid at the last two MPC meetings are still valid, we believe that a decision to cut the policy rate may go against the monetary authority’s objective of price stability.

Foreign fund inflows

In light of this, we expect the MPC to hold rates at the current level while also reiterating their resolve to drive foreign fund inflows in a bid to aid FX liquidity and consequently, price stability.”

Emefiele dismisses calls for rate reduction

Meanwhile, Governor, Central Bank of Nigeria (CBN), Mr. Godwin Emefiele has dismissed calls for reduction in the Monetary Policy Rate (MPC).

Speaking in Lagos on Friday at the annual Bankers Dinner of the Chartered Institute of Bankers of Nigeria, Emefiele said that reducing the MPR at a time inflation is 18.3 percent will be tantamount to irresponsibility on the part of the CBN.

He said: “In response to recent calls by notable persons and groups on the Central Bank to reduce the country’s high lending rates, I think it is important that I share my views on this issue.

“Let me first state that I have long been a believer in low interest rates. In fact, when I unveiled my vision for the CBN on resumption as Governor in June 2014, reducing interest rates was one of my cardinal missions. Yet, it is important that we discuss this issue based on facts, rather than politics and/or emotions.

“First, interest rates are a veritable tool for curtailing inflation and with inflation at over 18

percent; the CBN would be abjectly failing on one of its cardinal objectives if it cuts interest rates at this time. Second, for those who say we need a rate cut to spur growth, we need to remind that high inflation is highly inimical to economic growth. Indeed, many empirical studies have estimated the threshold level at which inflation becomes significantly growth retarding to be 11 percent for developing countries.

“With ours at 18.3 percent, one must question the judgment of cutting interest rates at this time.   Finally, I think it is important to underscore that interest rates reflects not just the cost of capital but also the cost of doing business, and so we need to also look at interest rates from the perspective of the lender.

“Given that most banks have to individually provide security, power, and other infrastructure, it is not surprising that some of these costs are passed on to customers in the form of high interest rates. Notwithstanding these facts, we will continue to use moral suasion to encourage commercial banks to be more considerate in interest charges on customers.”




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