CBN Maintains Tight Policy Stance, Retains Key Policy Rates

THE Central Bank of Nigeria (CBN) yesterday against industry watchers’ expectations failed to relax monetary policy stance which has been in force for almost a year but rather retained the existing rates, explaining that the decision was to wait for President Muhammadu Buhari’s planned economic blueprint unveiling.

Also, the CBN resisted the much expected devaluation of the Naira which has come under serious pressure against major world currencies, particularly the dollar, following low accretion to the foreign reserves as a direct response to Nigeria’s crude oil export quantity shock and failing prices at the international market.

At a press briefing after the Monetary Policy Committee (MPC) meeting in Abuja, the CBN Governor and Chairman of MPC, Mr. Godwin Emefiele explained that the Committee adopted a cautionary approach to the adjustment of the key rate principally because of the observed macroeconomic indicators in the first two quarters of the year as well as the need to await the unveiling of the new government’s economic plan.

Accordingly, the MPC, he said retained all the existing MPC rates. He said: “ Overall, the MPC voted to hold its position. In summary, the MPC voted:  To retain the MPR at 13 per cent with a corridor of +/- 200 basis points around the midpoint; retain the CRR at 31 per cent; and to retain the symmetric corridor of 200 basis points around the MPR.”

However, analysts at WSTC Financial Services Limited have said the decision of the MPC to maintain status quo despite the growing inflationary pressures and increasing volatility in the parallel segment of the foreign exchange market underscores the fact that the apex bank is getting to the limits of monetary policy options at its disposal.

We believe the CBN may remain incapacitated in this way until there are clear policy directions from the fiscal side of economic management, particularly on issues bordering on fuel subsidy and economic administration. Given this, and the retention of status quo by the MPC in its meeting today, we do not expect any significant change in the course of the financial markets. “We generally expect the bearish trend in the financial markets to remain within the short term outlook.

We strongly believe that the decision to hold on to its tight monetary stance in the face of waning economic growth is borne out of the need to keep the Naira “afloat” without necessarily devaluing the Naira. “However, given the stern realities presented by softening crude oil prices and increasing volatility in the parallel segment of the FX market – a condition that has intensified speculative activities and round-tripping, we retain our position on the imminence of currency devaluation,” the analysts said.

But Emefiele explained that in arriving at the decision, the Committee considered the underlying fundamentals of the economy, the evolving international economic 0environment, developments in oil prices as well as the need to allow for the unveiling of the economic agenda of the Federal Government.

He spoke more on other factors that guided the decision: “The Committee was concerned about the trends in key macroeconomic indices in the first half of 2015.

The Committee acknowledged the absence of easy choices in the circumstance but monetary policy alone is limited, and would require urgent complementary fiscal policies to define the path of growth and create the basis for stabilisation. “On the external front, the adverse effect of the protracted decline in global crude oil prices on the fiscal position of government is becoming increasingly obvious.

The expected policy normalisation in the US could accentuate capital flow reversals from emerging and developing economies and further tighten global monetary conditions, thus exerting greater pressure on exchange rates in those countries.

Given the choice between controlling either quantity or price, the limitations on choosing quantity were evident necessitating the need to employ some flexibility around price while allowing current demand management measures to fully work their way through the economy.

The Committee however noted that financial system stability considerations placed key limitations on the extent of considering price flexibility, creating a compelling need to balance measures to address the current vulnerabilities.

On inflation, the Committee stressed that some of the drivers of the current pressure on consumer prices were transient and outside the direct influence of monetary policy.  Pressure on food prices is expected to gradually wane as the planting season gives way to harvests in the months ahead.

Early resolution of fuel scarcity would dampen transportation costs and improve food distribution across the country while improvements in electricity supply could steady output at lower costs.  “Overall, the Committee expressed optimism that business confidence would continue to improve as Government continues to unfold its economic plans.”