The Monetary Policy Committee of the Central Bank of Nigeria finally met on Wednesday and Thursday November 21 and 22 2018 as a result of the public holiday declared by the federal government on Tuesday. The MPC has decided to leave the interest rate unchanged.
Since July 2016 when it increased the benchmark interest rate, the Monetary Policy Rate (MPR), from 12 per cent to 14 per cent, the MPC has held the rates steady, citing the need to combat inflation and ensure exchange rate stability.
The MPC maintained its stance despite facing pressure from the Organised Private Sector (OPS) and calls by respected economist, Mr. Bismarck Rewane, in the last two years, for a cut in interest rates. Rewane, for instance, has consistently argued that a rate cut was necessary to boost Gross Domestic Product (GDP) growth especially in the wake of the economy’s exit from recession in the second quarter of 2017.
However, in the last few months, expectations that the CBN may cut rates have gradually changed to speculation that a rate hike could be on the cards following an increase in inflation as well as rising capital flows occasioned by normalisation of interest rates in the United States and some other advanced economies. Significantly, the latter has resulted in the country’s external reserves falling by $6billion since end of June this year.
But the consensus among experts last weekend was that the last meeting of the MPC this year, which begins today in Abuja, will see the apex bank retaining rates.
For instance, in a note obtained by New Telegraph, analysts at FSDH Research stated: “Rising demand for foreign exchange leading to a consistent decline in the foreign reserves, and rising inflation rate are major justifications for an increase in policy rates. However, FSDH Research believes members of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) may decide to delay an increase in the monetary policy rate until their January 2019 meeting. “
Noting that at its meeting in September 2018, the MPC maintained the MPR at 14per cent, with the asymmetric corridor at +200 and -500 basis points around the MPR and also retained the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) at 22.50% and 30% respectively, the analysts predicted: “The CBN may continue to use the conduct of Open Market Operations (OMO) to manage the temporary liquidity in the financial system that may affect price stability.”
Besides, they pointed out with another imminent hike in US interest rates further placing additional demand pressure on foreign exchange in Nigeria and possibly increase capital flight from emerging markets: “ A rate cut in Nigeria is not appropriate under these situations,” adding: “The short-term forecast for the Nigerian economy shows that economic growth remains fragile.”
Besides, the analysts stated: “The IMF forecasts a growth rates of 1.9% and 2.3% in 2018 and 2019 respectively. These growth rates are lower than the Nigerian population growth rate. Thus, the economy needs policy stimulus to record a growth rate that is inclusive. “Nevertheless, monetary policy easing in the form of an interest rate cut may not stimulate growth. Appropriate fiscal measures and incentives that will improve the ease of doing business in Nigeria will lay strong foundation for sustainable growth.”
According to them: “Despite the expected rise in the inflation rate, it will be difficult for a hike in the interest rate to stem the rising inflation rate, as the cause of the rising inflation rate is not within the scope of monetary policy. The MPC may deal with the possible negative impact of an increase in the minimum wage at its January 2019 meeting.
“Looking at possible policy options open to the MPC, FSDH Research is of the opinion that members of the MPC will vote to maintain interest rates at the current levels. The CBN can continue to use the Open Market Operations (OMO) to manage liquidity in the banking industry in order to maintain price stability.”