At the Monetary Policy Committee (MPC) of the Central Bank (CBN) concluded yesterday, six out of eleven members voted to lower the monetary policy rate (MPR) by 50bps to 13.5% from 14% while the asymmetric corridor was retained at +200/–500 basis points.
The Liquidity Ratio and Cash Reserve Ratio were also maintained at 30.0% and 22.5% respectively. The decision was influenced by the need to stimulate growth and encourage employment. The committee had maintained the benchmark interest rate at 14% since July 2016.
We note that the decision to lower the MPR and adopt a pro-growth approach is in line with global trends. However, the big question is if a 50bps reduction in the MPR will help in accelerating economic growth. We do not believe so but it at least signals that the monetary policy committee is beginning to move towards a loose monetary stance and is considering growth as a priority.
That said, going forward, we believe the CBN will not be so aggressive with loosening as concerns over portfolio flows should still remain high on the CBN’s priority list.
Members of the committee examined developments in the global macro-economy,
whose prospects are not looking so optimistic at this time. Uncertainties around Brexit
negotiations and unresolved trade conflict between the US and China which could
accelerate the slowdown of the Chinese economy.
In view of the elevated risks to global growth, the IMF downgraded its 2019 global growth forecast to 3.5% from 3.7%. The progress in the Nigerian economy was evaluated against the backdrop of a downbeat outlook for the global economy. Inflation has moderated from 2017 levels and has remained sticky at 11% since mid-2018. Also, the Nigerian economy sustained its recovery in 2018 posting a decent 1.9% y/y growth driven by the non-oil sector. Although, economic growth in Q4 2018 (2.4%) crossed the 2.0% psychological mark, output from the real sector remained weak.
In addition, foreign portfolio flows to the economy were higher in 2018 by 37% than 2017. This, in addition to oil trading around US$60/bbl, supported the 7% accretion in reserves in the year, bolstering the ability of the CBN to defend the naira. Against this backdrop, we think the Nigerian economy has showed resilience despite the headwinds in the global economy, recording moderate improvement in macroeconomic conditions.
Although, a reduction in the benchmark rate is expected to result in lower borrowing
cost and stimulate lending to the real sector, we struggle to see this playing out. We do
not believe the banks will increase lending to the real sector as the risks in the
macroeconomic environment remain elevated and yields on money market instruments
remain attractive. Moreover, the transmission mechanisms of the monetary policy
Notwithstanding, we note that the MPC’s decision to lower the MPR and adopt a progrowth approach is in line with global trends. Since December, the US Federal Reserve
Bank has joined the Bank of England (BoE) in shifting its stance from monetary policy
normalisation to monetary accommodation whilst providing forward guidance that they
would allow macro-economic data to dictate the pace and direction of interest rates.
The easing tone on interest rate normalisation in advanced economies is due to
weakening output growth alongside moderating inflation. This is positive for emerging
market economies, like Nigeria, as it increases the likelihood that foreign flows may be
re-directed to them. In addition, subdued political risk on the back of the conclusion of
the general elections alongside oil trading comfortably above the US$60/bbl benchmark
for the 2019 proposed budget makes it a rational decision for reduction in the MPR in a
bid to stimulate economic growth.
However, the big question is if a 50bps reduction in the MPR is enough to accelerate
growth. We do not believe so but it at least signals that the monetary policy committee
is beginning to move towards a loose monetary stance and is considering growth as a
priority. That said, going forward, we believe the CBN will not be so aggressive with
loosening as concerns over portfolio flows should still remain high on the CBN’s priority
list, hence the reason for only a 50bps cut now. Despite a positive outlook for 2019, the
price of oil, a major source of foreign exchange to the country-remains extremely
volatile. Oil trading at lower levels poses a threat to economic stability as it could stall
the accretion of reserves and threaten exchange rate stability. Therefore, portfolio flows
are still a go-to buffer in order to maintain a stable exchange rate and the MPR must
remain attractive enough to sustain them.
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