MPC decision aggravates policy uncertainty – Khan

The decision of the Monetary Policy Committee (MPC) of the Central Bank of
Nigeria (CBN) to maintain the status quo has aggravated uncertainty about
policy direction in Nigeria. Managing Director, Chief Economist, Africa, Razia
Khan stated this in response to the decision of the MPC to retain the
benchmark interest rate, Monetary Policy Rate (MPR) at 13 percent.
She said, "The overall sense one got from the MPC is that policy might still
change in the near future, but it is difficult to predict how – the FX market
may or may not be liberalised, banks may or may not be compensated for
some of the CRR sterilisation, policy rates may or may not be cut" In addition
to retaining the MPR at 13 percent, the MPC at the end of its meeting on
Friday also retained the 31 percent Cash Reserve Ratio (CRR) for banks.
"In consideration of the underlying fundamentals of the economy, the evolving
international economic environment, developments in oil prices as well as the
need to allow for the unveiling of the economic agenda of the Federal
Government, the Committee decided by a vote of 8 to 4 to retain the Monetary
Policy Rate at its current level of 13 per cent, by a unanimous vote to retain
the CRR at 31 per cent while 4 members voted to remunerate the CRR", said
the CBN Governor, Mr. Godwin Emefiele, in a communiqué issued at the end of
the meeting.
Razia Khan however noted that, "Clearly Nigeria is in a difficult position.
Growth is slowing, but with inflation set to rise, it is not obvious that policy
can be loosened very substantially. "The CBN – rather hopefully in our view
– expressed optimism that many of the factors driving up prices were likely to
be transient and that with the onset of the harvest season, food prices would
decline. Similarly, with improvements in Nigeria's refining, fuel shortages
might ease in the near future.
"We take a somewhat different view. Despite the recent slowdown in money
supply growth, shortages of key items should keep price pressures sustained,
in our view. Given fiscal and external pressures, expectations of a future
adjustment in the FX rate will keep inflationary expectations elevated.
Achieving a turnaround in inflation may not be easy.
"In our view, the need for Nigeria to retain its GBI-EM index inclusion still
argues for foreign exchange liberalisation at some point. Until this happens,
there will be limited scope for any monetary easing to boost the economy
(although the immediate inflationary consequences of foreign exchange
liberalisation might also see any meaningful easing deferred).