The decisions taken by Nigeria’s Monetary Policy Committee (MPC) on Tuesday have both positive and negative implications on the nation’s economy, some finance analysts have said. As expected by most analysts and in line with market expectations, Nigeria’s Monetary Policy Committee (MPC) upheld the benchmark rate yesterday for the twelfth consecutive time citing stability across major economic indicators in recent months. Voting 11 to 1, the MPC left the Monetary Policy Rate (MPR) – at 12 per cent per annum with an asymmetric corridor of +/- 200bps; Cash Reserve Ratio (CRR) on private sector deposits unchanged at 12 per cent; CRR on public sector deposits maintained at 50 per cent; Liquidity ratio at 30 per cent of total assets; and Net open position of 1 per cent of shareholders’ funds. Highlighting the need for real sector growth, Afrinvest West Africa, an investment institution, said it would want to see a reduction in the nation’s MPR, to ensure progress in the real sector. “Afrinvest Research maintains its position in favour of a reduction in the MPR in order to grow the real sector and prevent the economy from any further decline as revealed in the GDP figures. “While we concede the inelasticity of the lending rates to monetary policy changes and GDP growth, the CBN should redesign policies that can offer affordable credit to the real economy,” the firm said in a research note issued on Wednesday. “We believe that any economy desirous of growth must encourage real sector growth by facilitating easy access to low cost funding and create an enabling environment for infrastructure delivery. The declining contribution of the Oil sector to GDP further buttresses our argument,” the firm added. The bright side, the firm said, was that maintaining the rates would have positive impacts on the naira. “On the other hand, the decision of the CBN to hold the key policy rate will encourage further foreign funds inflow into the economy and by implication stem the pressures on the naira. However, Nigeria remains vulnerable to hot money reversals as a result of the quantum of Foreign Portfolio Investments in the country. The high interest rate environment (positive real return) and benign inflation outlook supports our view,” Afrinvest said. With this development, Nigeria has joined South Africa, Kenya and Ghana in leaving the benchmark interest rates unchanged in the last quarter. “The decision to leave rates unchanged is considered to be a defensive and strategic move,” Bismarck Rewane, Managing Director, Financial Derivative Company, a diversified financial institution, said. According to him, the difference between the inflation rate and the benchmark rate in Nigeria (i.e. real rate of return) has widened to 3.8 per cent from 3 per cent in January. Also, GDP growth declined to 6.18 per cent in quarter two. “Under normal circumstances, the above scenario is a justification for a cut in rates. However, the risk of excessive fiscal spending due to the run up of the 2015 election persists,” he said. He said the MPC before arriving at its decision, considered many factors including increased fiscal spending, strong demand pressure linked to political events, volatility in interest rate and stale mate in FAAC disbursements, as well as moderate inflationary pressures. “The CBN projects the inflation rate to remain below 10 per cent for the next four months due to base effects and the impact of a tight monetary policy stance. Nonetheless, the major threat to price stability remains the fear of fiscal dominance and high-powered money,” he said. Renaissance Capital, an investment bank, said it noted that the Committee did not seem worried over the liquidity crunch banks have been reportedly trying to weather. “MPC did not appear overly concerned with recent spike in interbank rates and liquidity crunch” the firm said, adding that it – viewed this as temporary. The firm noted that naira stability is still key target of the MPC and the CBN is fully committed to supporting the currency. It added that key concerns of the committee include strong demand for foreign exchange which is not related to import of goods, but related to run-up of 2015 elections, and banks “continued dependence… on monetised oil revenues for liquidity” which means the sector is still vulnerable to external shocks. Renaissance Capital also said it is unlikely to see a reduction in the MPR or CRR anytime soon; going by the concerns raised by the committee, which would have impact on bank’s liquidity positions. The firm added that there is even a possibility the rates could be hiked, if the concerns persist. It said the “Risk of a further hike in the CRR cannot be ruled out if the MPC sees renewed pressure on the naira. For the banks – no reprieve, we believe liquidity is likely to remain tight”.
Posted on: Thu, 26 Sep 2013 14:40:28 +0000