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CBN’s rate decision and sustained caution over domestic, global issues

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Godwin Emefiele, CBN Governor

At the end of the bi-monthly Monetary Policy Committee (MPC) meetings for September, the Central Bank of Nigeria (CBN) retained all policy rates, as dictated by the eleven-member policymakers in attendance. They unanimously voted to maintain Monetary Policy Rate (MPR) at 14 per cent, with the asymmetric corridor of +200bps/-500bps, Cash Reserve Ratio (CRR) at 22.5 per cent and Liquidity Deposit Ratio (LR) at 30 per cent.

The apex bank’s decision to miss the fast-moving global easing train was to monitor domestic and global developments a little more, perhaps to decide to jump aboard at a later stop, with better front row seats.

It was obvious that the sentiment of individual members of the committee towards easing monetary conditions weakened compared with the July meetings and comes as a contrast to the recent dovish stance by central banks in advanced economies.

For example, there have been waves of rate cuts in systemically important central banks to boost growth as a result of the slowdown in the global economy, with the Federal Open Market Committee (FOMC) of the US Federal Reserve taking the latest slash of policy rate by 25bps to 1.75 per cent-2 per cent range last week. This was its second rate cut since 2008.

For analysts at Afrinvest Securities Limited, the decision to hold, rather than cut, means that the CBN would continue its unconventional approach to monetary easing.

“We expected sustained pressure on the banks to boost lending as the September 30, 2019 deadline for meeting the minimum Loan to Deposit Ratio (LDR) of 60 per cent looms. We expect CBN’s development financing interventions to be expanded to support growth. In our opinion, there is a need to go back to convention by restoring the relevance of the MPR as a policy instrument necessary for guiding monetary policy,” the analysts said.

However, in a note at the weekend, by the Managing Director of the company, Ayodeji Ebo, he said there is a conflicting monetary policy stance, which is likely to continue, because the apex bank opted to ease financial conditions through credit to the real sector, while on the other hand tightens the financial market.

“I think the need to retain and attract foreign investors to the fixed income market has prompted the tightening stance. This is important as the CBN intends to maintain exchange rate stability in the face of declining external reserves, which has been prompted by a weak current account balance and slowing portfolio flows,” he said.

The provisional data from CBN showed that current account balance remained negative at -2.5 per cent of GDP in second quarter (Q2) 2019 against -2.7 per cent in Q12019).

Similarly, the rhetoric on FX demand management through restrictions to food imports has gained steam and expectedly, CBN would continue to manage system liquidity to guide desired rates in the fixed income market.

A Senior Research Analyst at FXTM, Lukman Otunuga, agreed that while the central banks across the world are easing monetary policy in the face of decelerating global growth and trade uncertainty, the apex bank opted to keep interest rates unchanged at 13.5 per cent to monitor domestic and global developments.

He said that given how economic growth remained sluggish, but inflation eased to a 43-month low in August at 11.02 per cent, the conditions were ripe for the CBN to turn on the stimulus taps to float the Nigerian economy.

“Investors just need to look at the disappointing growth in domestic product for the second quarter of 2019, which highlights how the nation remains exposed to both domestic and external risks.

“While the prospects of rising oil prices amid geopolitical tensions could lend some support to the nation, the short-term benefits will be overshadowed by core themes weighing on the nation.

“Should trade disputes, volatile oil prices and unfavorable global conditions continue exposing Nigeria to downside shocks, the CBN could be forced to turn on the monetary policy life support to prevent the economy from flattening,” he said.


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