What Monetary Policy Committee Will do on Tuesday
Godwin Emefiele, CBN Governor

What Monetary Policy Committee will do on Tuesday

Sometimes, people read certain things that they don’t understand. This is the case where your areas of discipline is different from what you are reading about. But in some cases, the problem is interpretation, in context or otherwise. Let me deal with the MPC decision today.

The interpretation is not conclusive, however, it provides a guideline for your next reading.

Decision: Increase monetary policy rate

The stock market will suffer a lot more. In fact, MPC will call an extraordinary meeting before 60 days. All share index will plummet. Manufacturers cost of production would automatically increase.

That means the price of goods will increase as they have to recover. But, no economic agent can control demand and supply altogether. Then, manufacturers will sell less, because disposable income has no direct relationship with the increase rate.

The best it does is to reduce the number of goods that a constant income earner would be able to buy. Banks would love this, interest rate arbitrage will continue. It means more profit for financial institutions because whether they swing right or left won’t really matter.

Sure, they will love to swing left to the fixed income market as MPR will serve as the benchmark rate for pricing money market instruments.

Read Also: Sell-Offs in Banking stocks, others drag Nigeria’s bourse lower

Decision: Reduce monetary policy rate

Foreign investors will take their money out, reduce FPI plus declined FDI would mean lower dollars account…Supporting Naira would become difficult. It will be more difficult if PMB accedes to Saudi requests to shed OPEC supply.

The equity market will experience a money flood, and bulls will overrun the market. Short term profit taking would likely return and heavy speculation would balance the equation eventually.

The lending rate will reduce but will be scarce, and banks will take more risk. Loans concentration would be skew to bellwethers, perhaps oil and gas segment. The creation of foreign currency loans would be unlikely except for those that have significant foreign currency deposits.

Manufacturers would access credits at lower cost but this will not translate to the lower price – historically proven. Prices don’t come down in Nigeria as there are shadow trading.

Decision: Hold monetary policy rate

That’s what MPC would do on Tuesday. For the 16th time, the benchmark interest rate stays at 14%. This is okay in the short term as other macroeconomic indices are converging to supporting rate cut in the future.

It means the status quo in the market would be maintained.

Banks will continue to be playing heavily in the fixed income market while aggregate loans book decline. Prices of goods and services will behave according to existing forces with light adjustment to peak and off-peak situations (random).

What monetary policy committee will do on Tuesday?