Why Monetary Policy Committee benchmarked interest rate at 14% – Emiefele


    ABUJA, Nov 21 – Nigeria’s central bank held its benchmark interest rate at 14 percent on Tuesday and said the recovery of Africa’s biggest economy from its first recession in a generation remained fragile.

    The Monetary Policy Committee held the rate at 14 percent, Central Bank of Nigeria Governor Godwin Emefiele told reporters on Tuesday in the capital, Abuja.

    Tight monetary policy helps to curb inflation and while lower rates would strengthen the outlook for growth, it could “aggravate the upward trend in consumer prices and generate exchange-rate pressures,” Emefiele said.

    “Loosening would worsen the current-account balance of the country through increased importation.”

    Governor Godwin Emefiele said eight committee members had voted to hold the main rate, while one voted for a cut. All other policy parameters were kept unchanged.

    “Inflation in particular requires very close monitoring to gain clarity on the medium-term optimum path of monetary policy,” Emefiele told a news conference.

    All 15 analysts polled last week said rates would be held at 14 percent, with cuts of up to 100 basis points expected in either July or September 2018.

    Official data on Tuesday showed growth of just 1.4 percent in the third quarter.

    Among other risks for Nigeria, Emefiele cited low fiscal buffers.

    The OPEC member’s economy shrank by 1.5 percent in 2016, its first annual contraction in 25 years. The recession was largely caused by low oil prices since the country relies on crude oil sales for around two-thirds of government revenue.

    “Mr. Emefiele’s hints about future monetary easing were pretty clear. It seems that policymakers are waiting for a more substantial fall in inflation before starting to lower interest rates,” said Capital Economics analyst William Jackson.

    Inflation is slowing but remained at an elevated 16 percent on an annual basis in October. At the media conference Governor Emefiele said he was optimistic consumer price-growth would moderate to one-digit levels in 2018.

    “It is unlikely that we will begin to see any monetary easing soon,” Christopher Dielmann, a senior economist at Exotix Capital, said in an emailed note. “Assuming growth remains in line with expectations, our models suggest that we are unlikely to see a loosening of the MPR until inflation falls to 12 percent.”

    Of the nine MPC members present eight voted to keep policy unchanged and one favored a 100 basis-points cut, Emefiele said. While the risks to inflation remains high, the committee sees price growth slowing to below 10 percent next year, he said.
    Increased Liquidity

    Policy makers have adopted a system of capital controls, multiple exchange rates and a trading window known as Nafex to stem a decline in the naira. While the complex regime has helped the official exchange rate converge with the black-market rate, the bank refuses to allow the naira to float freely. The Nafex trading window has led to great dollar liquidity, Emefiele said.

    Economic growth accelerated to 1.4 percent in the third quarter from 0.7 percent in the three months through June, as the output of oil, Nigeria’s biggest export, increased. The non-oil sector contracted. Gross domestic product expanded 0.8 percent for the year, International Monetary Fund, after it contracted 1.6 percent in 2016.

    “We do not expect to see any shift in monetary policy until growth is more broad-based and firmly in positive trajectory and inflation within tolerable limits,” Pabina Yinkere, an analyst at Vetiva Capital Management Ltd., said by email.

    The central bank has kept the monetary policy rate unchanged since July 2016, balancing the need to fight inflation and stabilize the naira with trying to support an economy emerging from its worst slump in 25 years.

    While price growth slowed to 15.9 percent last month, it’s been above the authorities’ target range for more than two years.


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