CBN Governor, Godwin Emefiele
CBN Governor, Godwin Emefiele

After lengthen session of deep analysis and assessment of various developments that could impact the economy from global and local fronts, the Monetary Policy Committee, MPC, of the Central Bank of Nigeria settled to hold key rates.

MPR, is left at 13.5% with asymmetry corridor around the MPR at +200/-500 basis points. Also, Cash Reserve Ratio (CRR) was maintained at 22.5% while it held Liquidity Ratio at 30.0%.

However, WSTC Securities think that liquidity concerns inform the MPC hold view.

To the Committee, no development in the economy or at the global level is grave enough to alter economic direction, performance or stability significantly in the short term.

Though analysts are of the view that policy rate would likely be adjusted downward on the expectation of further drop in inflation rate.

On the global front, the Committee noted the softening global growth as output across major advanced economies remains subdued, confronted by legacy headwinds including the subsisting trade war between the US and China.

This also includes  regional hostilities in the Middle East, rising debt levels, growing uncertainties around the Brexit as well as the increasing political tensions between the US and Iran.

The Committee also noted the fragilities in the financial market, all of which contributed to dampening the global growth prospect.

In the emerging and developing economies, the Committee pointed out that output growth remains broadly mixed with some economies performing stronger than the others.

Consequently, the International Monetary Fund revised its projected global growth forecast to 3.2% in 2019 from 3.6%.

In the light of the weaker than anticipated domestic output recovery, the Committee examined the performance of core macroeconomic data of the economy.

The Committee noted that real GDP grew by 1.94% year on year in the second quarter of 2019 compared to the growth of 1.50% in the comparable period in 2018, mainly driven by the oil sector.

The Committee noted that the mediocre growth was consistent with the global trend of dampening output growth.

At 57.7 index points and 58.0 index points, the Manufacturing and Non-Manufacturing Purchasing Manager Indices (PMI) grew for the 30th and 29th consecutive months in August 2019, respectively.

According to the Committee, projections indicate that real gross domestic product, GDP, in the third and fourth quarter 2019 will average 2.11% and 2.34%, respectively, driven primarily by the non-oil sector.

The Committee pointed out that the optimism in growth prospects is anchored on the new momentum of rising credit to the private sector.

However, the headwinds to the growth prospects remain high unemployment, increasing public debt and heightening insecurity across the country.

The Committee expressed satisfaction in the moderation of the headline inflation to 11.02% in August 2019 from 11.08% in July 2019; driven by the decline in food and core components.

The Committee, however, noted the upward pressure imposed on prices due to rising insecurity in the food-producing areas of the country, increased liquidity injection from

It highlighted the imperative to address the economy infrastructural deficit such as power supply, upgrade of transport and production infrastructure as a means of reducing cost-push inflation.

In the financial markets, the Committee observed the continued bearish trend in the equities market, while noting the increased activity in the sovereign bonds market, reflecting global trends and investor preference for fixed income securities.

Consequently, the All-Share Index (ASI) declined by 11.62% to 27,779.00 index points on September 13, 2019, from 31,430.50 index points at the end of December 2018.

The MPC also noted the improved performance and resilience of the banking sector, evidenced by the continued moderation in the ratio of Non-Performing Loans (NPLs) from 11.2% to 9.4% in May and August 2019, respectively.

While noting that this was still above the prudential benchmark of 5.0%, the Committee called on the management of banks to drive this ratio below the prudential benchmark.

In arriving at its decision, the Committee felt compelled to review the options of whether to tighten, hold or loosen.

The Committee noted the positive moderation inflation. But given that it is still above the target range of 6 – 9% and considering the pressure on reserve accretion caused by the relatively weak crude oil price, the MPC felt the imperative to tighten.

On the contrary, the Committee was of the view that doing so amid a fragile growth outlook would increase the cost of credit, and further contract investment and constrain output growth.

On loosening, the Committee felt that this would result in increased system liquidity and hence, heighten inflationary tendencies in the economy and exchange rate pressures.

As regards the option to hold, the MPC opined that the option requires a clear understanding of the quantum and timing of liquidity injections into the economy, before deciding on possible adjustments to the stance of monetary policy.

The Committee was also of the opinion that retaining the current position of policy offers pathways to appraising the effects of the suit of heterodox monetary policy to encourage credit delivery to the real sector.

Analysts attribute this to the subsisting implementation of the Loan-to-Deposit Ratio policy.

Given the preceding, the Committee decided by a unanimous vote to retain the Monetary Policy Rate (MPR) at 13.5% and to hold all other policy parameters constant.

MPC hold key rates, says loosening would heighten inflationary tendency

VIAJulius Alagbe
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