COVID-19: Analysts say CBN’s stimulus measure marginal on economy as MPC holds rates

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has bucked the world central bankers’ policy trend, hold policy rates amid COVID-19.

The Committee has unanimously voted for a hold of the policy rates, as CBN waits to see how the recent stimulus packages would impact the economy.

All the policy parameters which include MPR at 13.5% with asymmetric corridor of +200bps/-500bps, liquidity Ratio at 30% and the Cash Reserve Ratio (CRR) at 27.5% were held.

In its review, MPC cited the need to allow the other alternative measures adopted by the management of the CBN to fully manifest with time before deciding on further monetary policy support.

“While a tightening approach will support external reserves and keep inflation in check, the approach will limit credit creation and result in adverse impact on economic growth”, it stated.

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Analysts said the reaction is inconsistent with the current situation where efforts are being made to stimulate aggregate demand and supply which have both weakened due to the coronavirus outbreak.

In their reactions, analysts believe that the stimulus measures adopted so far are marginal at less than 1.0% of GDP. They said the impact on the economy would be limited.

On the other hand, the MPC argued that while a loosening will stimulate aggregate demand, it yet remained cautious not to exacerbate rising inflationary pressures, and to prevent an exchange rate instability

In their reaction, analysts at Afrinvest said: “While we have seen a dovish chorus across systemically important central banks, the decision to hold is unsurprising given a raft of stimulus packages rolled out last week by the CBN to support the real sector given Covid-19 spillovers.

Analysts restated that the MPC noted that it is adopting a wait-and-see approach to observe the effectiveness of its stimulus measures.

To mitigate the negative impact of the pandemic, the CBN announced 6 policy measures aimed at boosting credit and stimulating aggregate demand and supply.

Recall that some of the measures announced by the CBN to support the economy include the reduction of interest rate to 5.0% from 9.0% and a one-year moratorium on all its intervention facilities.

The CBN also created a ₦50.0bn targeted credit facility to support households and SMEs as well as a special credit support of ₦1.1 trillion for the manufacturing and the healthcare sectors respectively.

“We believe the stimulus measures adopted so far are marginal at less than 1.0% of GDP and the impact on the economy would be limited.

“We had expected a reversal of the CRR increase by 500bps to 27.5% during the January MPC meeting to support banks and allow credit flow to the economy.

“While maintaining exchange rate stability remain top of the agenda, we believe the CBN might need a sharper exchange rate adjustment to relieve external pressures and support the broader economy”, Afrinvest remarked.

Meanwhile, the MPC acknowledged the improved GDP growth of 2.55% in Q4’19, compared to 2.28% in Q3’19 and 2.38% in Q4’18.

However, it expects the Nigerian real GDP growth to slow in Q1’20 due to the pass-through effect of the coronavirus outbreak and oil price war on economic activities in the economy.

Consequently, the overall growth outlook of the Nigerian economy in FY’20 is weak.

The MPC also noted the growth in aggregate loan to private sector by N2.35trn since the implementation of the Loan-to-Deposit Ratio (LDR) policy.

The dismal performance of the equities market was noted by the MPC, attributed to profit taking and divestment of Foreign Portfolio Investors (FPIs), and capital outflows induced by the COVID-19 outbreak.

According to the MPC, the medium term outlook for the global economy is uncertain.

This was attributed to weak global output, resulting from disruptions in global supply chain arising from the coronavirus pandemic and oil price downturn.

This also include vulnerabilities in major financial markets, and rising debt levels of advanced and developing economies.

On the domestic front, a subdued growth is anticipated for the Nigerian economy in 2020, resulting from the current downtrend in oil prices.

The downside risks to the Nigerian economy growth include the continued spread of the coronavirus, reduced government revenue, declining oil and non-oil receipts, infrastructural and security challenges.

However, the MPC asserted that the economic headwinds are to be mitigated by the responses of the fiscal and monetary authorities in containing the economic impact of the COVID-19.

Some of the efforts made include the adjustment of the 2020 budget, in which the budget size was reduced by N1 trillion.

The oil price benchmark was also reduced from $57 per barrel to $30 per barrel.

Other efforts are sustained CBN interventions, enhanced flow of credit to the real sector and deliberate efforts to diversify the economy.

Analysts at WSTC Securities stated that in general, the MPC noted the coronavirus pandemic to be both a health crisis and an economic crisis.

On the implication of continued oil supply glut in the future, MPC agreed that the impact of the declining oil prices will manifest on the external reserves and the emergence of exchange rate pressures.

WSTC Securities expects to see an upward trend in the yields of fixed income instruments, particularly the OMO bills in a bid to curtail foreign portfolio outflows.

Analysts said on the adjustment on exchange rate to N380, they are yet to believe that other factors such as the current account deficits and overall loss of confidence in the economy by foreign investors will continue to drive increased foreign portfolio outflows.

Also, looking at the equity market, analysts remarked that they do not see any significant change in the current bearish trend in the equities markets.

Most especially with the disruption in aggregate demand and aggregate supply, owing to the coronavirus pandemic.

On the FX market side, analysts noted that due to lower crude oil prices and increased pressures on the external reserves, the CBN adjusted the official rate from N306 to N360, and further increased its intervention rates to BDC from N359 to N378.

“We see this move as a positive one, however, we expect to see short-term speculative pressures in the parallel market”, WSTC analysts held.

Coronation Research had expected the Committee to adjust rates downward.

Analysts at Coronation was of the view that the way may be open to adjust the headline 13.5% rate downwards as a response to economic pressures caused by the coronavirus.

Coronation research stated that the MPC no longer makes a close connection between domestic interest rates and Naira/USD rate.

“This may give MPC the confidence to signal economic stimulus-as the most of central banks of the world are doing now by reducing its headline 13.5% MPR”

COVID-19: Analysts say CBN’s stimulus measure marginal on economy as MPC holds rates

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