Ahead of the Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN) which holds its fourth meeting of the year today and tomorrow, analysts at FSDH Research believe that the most appropriate monetary policy decision under the current economic and financial market situation is to hold policy rates at the current levels despite new pressure points.
The analysts said although there were some arguments to increase rates, the need to provide necessary incentives for the Nigerian economy to achieve inclusive growth negated an option of a rate increase.
At its meeting in July 2018, the MPC maintained the Monetary Policy Rate (MPR) at 14 per cent, with the asymmetric corridor at +200 and -500 basis points around the MPR; it retained the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) at 22.50 per cent and 30 per cent respectively.
It also announced measures to provide cheaper funding for some critical sectors of the economy to boost economic activities.
On the international market, the growing trade war between the US and China has heightened global risks which may lead to an increase in interest rate. In addition, FSDH Research believes the Federal Open Market Committee (FOMC) of the US Federal Reserve may likely raise the Federal Funds Rate (Fed Rate) by 25 basis points when the committee announces its decision on Wednesday, September 26, 2018.
The Fed maintained the rate at 1.75 per cent – 2.00 per cent when it met in July 2018. The US unemployment rate at 3.9 per cent (lower than the target of 6.5 per cent), inflation rate of 2.7 per cent (higher than the target of two per cent) and the strong growth of 4.2 per cent in the economy all support an increase in the interest rate.
The analysts said, ’A rate hike may further increase global yields with its attendant impact on capital flights from emerging markets and demand pressure at the foreign exchange market. Thus, a rate cut in Nigeria is not appropriate under these situations.”
They said the sluggish growth rate of 1.5 per cent the Nigerian economy recorded in Q2 2018 called for urgent policy measures and engagements to boost economic activities.
Although the fragile growth was driven by the non-oil sector, the fact that dominant sectors of the economy either recorded low growth or contracted in Q2 2018 indicates that urgent action is required.
The Purchasing Managers’ Index (PMI) survey published by the CBN for the month of August 2018 expanded further. The manufacturing PMI of August stood at 57.1 points from 56.8 points recorded in July. Production levels, new orders and employment level grew at a faster rate in August than in July.
The non-manufacturing PMI also increased, with new orders and equipment growing at a faster rate in August than in July. FSDH Research notes that although the expansion in the PMI is a good development, it may not necessarily translate to an increase in the Gross Domestic Product (GDP) in Q3 2018. Therefore, a combination of monetary, fiscal and trade policies are needed to stimulate sustainable growth.
They, therefore, argued that, “A tight monetary policy stance in the form of increase in interest rates would not be appropriate, looking at possible policy options open to the MPC.”
FSDH Research is of the opinion that members of the MPC will vote to maintain interest rates at the current levels.
“The CBN can continue to use the Open Market Operations (OMO) to manage liquidity in the banking industry in order to maintain price stability’’, it said.
Meanwhile, Uche Joe Uwaleke, a Professor of Capital Market and a Head of Department at the Nasarawa State University, Keffi, said he was not expecting changes in the parameters from today’s meeting.
“I am not expecting any change in the policy parameters when the MPC meets. The committee is not likely to lower rates because of the following reasons: Firstly, interest rate hike in the US which is triggering capital flows out of Nigeria leading to a drop in external reserves. Secondly: the threat on crude oil price from US-China trade war. Thirdly: the reversal in downward trend in inflation. Fourthly: labour’s demand for minimum wage implementation. Fifthly: the increasing FAAC allocation and the rising pre-election spending.”
He also noted that he did not “foresee further tightening of monetary policy due more to political reasons since experience has shown that governments try as much as possible to avoid unpopular policies with the approach of general elections.”