MPC Decision Signals Sustained Pro-growth Bias against Price Stability
Following the Monetary Policy Committee (MPC) decision to sustained key rates, analysts have expressed concern that the Central Bank of Nigeria may have abandoned price stability for its pro-growth stance.
The CBN policy stance which has remained dovish has helped companies to re-adjust their finance mix while banks margin on lending has fallen.
In the same way, yield on fixed income securities have remained low, thus supporting increased credit to private sector.
However, the nation’s macroeconomic data shows there is an instability in price level, driven by increased in food prices.
As a result, Nigerians have not really benefited from low-interest rate environment directly or indirectly as rising prices of goods and service has lifted million to live below misery index.
At the just concluded policy committee meeting, policies rates were left unchanged despite multiple pressures facing the economy.
In its macroeconomic note, Chapel Hill Denham stated that the decision was in line with expectation.
The MPC voted unanimously to retain the benchmark Monetary Policy Rate (MPR) at 11.50%, and the asymmetric corridor around the MPR at +100bps/-700bps.
The Committee also voted unanimously to retain the Cash Reserve Requirement (CRR) at 27.5%, and liquidity ratio at 30.0%.
In its review, MPC key considerations include sluggish recovery in manufacturing and non-manufacturing Purchasing Managers’ Indices.
The indices remained below the 50-index point benchmark in December 2020, at 49.6 and 45.7 index points, respectively, attributed to the resurgence of the pandemic, FX pressures; increased cost of production, general increase in prices and decline in economic activities.
The Committee also expressed concerns on the persisting uptick in inflationary pressures for the 16th consecutive months.
In January, the National Bureau of Statistics reported that headline inflation rate moved further to 15.75% year on year in December 2020 from 14.89% in November 2020.
The CBN has remained committed to dovish stance which has allowed yield on fixed income market to continue dropping.
Also, the policy committee considered growth in broad money supply (M3) to 10.97% in December 2020 from 5.02% annualised in November.
Analysts stated that this driven by expansion in Net Foreign Assets (NFA) by 4.96%, while aggregate domestic credit also strengthened by 13.40% from 9.48% annualised in November.
Meanwhile, gross banking sector loans stood at N25.02 trillion in December 2020, while the CBN has disbursed credit under different real sector intervention funds, such as the Anchor Borrowers Programme (N554.63bn) and N2.0tn in COVID-19 related stimulus measures.
This was followed by marginal increase in NPL ratio to 6.01% from 5.88% in November.
In addition, the Committee noted recent impressive performance recorded in the equities market, particularly the increased patronage of local investors, driven by low fixed income yields.
“The MPC continued to strike a neutral tone, considering the competing goals of macroeconomic stability and economic growth.
“The committee considered the options of easing further or tightening, but came to the conclusion that a neutral stance will be more optimal.
“While the MPC believes there is a justification for easing, given the COVID-19 induced economic challenges and the need to keep cost of credit low for government, corporates and households, it noted the risk of rising inflation rate and deeper negative real interest rates with consequences for the exchange rate”.
Also, the committee noted that tightening will run against its current objective of making credit available for corporates and households.
Against this backdrop, the committee decided to remain neutral, while it reinstated its readiness to continue to prioritise growth, through targeted development funding initiatives in the real sector.
The CBN governor also hinted that the Bank will partner with the Presidential Taskforce and Private Sector Coalition Against COVID-19 (CACOVID) to procure and distribute vaccines throughout the country.
“The first MPC meeting of the year held against the backdrop of improving economic growth backdrop, and increased macroeconomic instability.
“The pace of economic contraction eased to 3.62% year on year in Q3-2020 from 6.1% year on year in Q2-2020, and we expect the Q4-2020 data, scheduled to be published next month, to print at -3.0%.
“However, the country’s recovery from the COVID-19 induced recession appears to be increasingly dampened by a resurgent wave of the virus, which has led to renewed restriction measures”, Chapel Hill Denham stated.
Analysts said authorities are also yet to unveil a comprehensive vaccination plan, implying restrictions will likely remain for longer.
“As a result of these, we have lowered 2021 GDP growth expectation to 1.7% from 2.0%”, the firm explained.
Equally important, Chapel Hill Denham said the increased macroeconomic instability appears to be the major challenge for monetary policy, given the CBN’s twin mandates of price and exchange rate stability.
Inflation rate hit a 37-month high of 15.76% in December 2020, mainly due to surging food inflation – 19.56% year on year.
Analysts said pressures on consumer prices are expected to remain elevated in H1-2021, with headline inflation rate expected to hit 16% in Q1-2021, before subsiding in H2-2021 when early harvest commences.
In the FX market, Chapel Hill Denham stated that liquidity in the Investors and Exporters Window totaled US$60.8 million in January 2021 remains below pre-crisis level of US$340 million, while the parallel market premium remains wide at 22%.
“A tighter monetary policy environment and increased FX flexibility will be instrumental in reengaging foreign portfolio inflows – which dropped by 65% year on year in 9M-2020”, analysts explained.
Foreign inflow will in turn help restore macroeconomic stability, analysts added.
“While the MPR has become a relatively blunted policy tool – typically divergent from market interest rates and also lagging the movement in market yields – it is still an important variable in setting medium term policy expectation.
“By the look of things, the MPC appears convinced that inflationary pressures are mainly supply-side driven and not necessitating a demand-side monetary policy response.
“The Bank also appears to be primarily concerned about supporting growth in the short term, rather than macroeconomic stability.
“As a result, we do not expect any changes in the CBN’s interest rate policy, until the economy returns to growth in Q2-2021E, at which point we expect the CBN’s pro-growth stance to take the back seat in favour of its primary mandates of price and exchange rate stability”, Chapel Hill Denham said.
Prior to the MPC meeting, investors in the fixed income market were positioning for a tight monetary policy framework over the medium term.
Notably, the Naira benchmark yield curve has expanded by an average of 233bps from the lows of about .3.3% in October 2020 to an average of 5.6% presently.
“Long term rates have risen faster than short term rates, due to duration apathy in anticipation of tighter monetary policy, and expectation of increased supply of bonds.
“This has resulted in a bear steepening with the slope of the benchmark curve at the steepest level since March 2020.
“Despite the neutral outcome of this meeting, investors will be paying close attention to the outcome of the next few NTB auctions to test the CBN’s resolve in keeping short term rates depressed at current level.
“However, based on liquidity factors and government deficit financing plans, our medium term outlook for yields remains biased to the upside”, Chapel Hill Denham stated.
MPC Decision Signals Sustained Pro-growth Bias against Price Stability. #MPC Decision Signals Sustained