Analysts call for drastic fiscal measures to reflate Nigeria’s economy, see rates retained as MPC meets


There are high expectations of retaining rates by analysts when the first Monetary Policy Meeting (MPC) in 2017 by the Central Bank of Nigeria (CBN) ends tomorrow.

The meeting which is the highest organ of monetary policy decisions is expected to come out with the policy direction in the sector for the first time this year.

Since July, 2016, MPC failed to take any major policy change. At the July meeting, it took a major decision to increase the Monetary Policy Rate (MPR) by 200 basis  – points from 12 to 14 percent.

Former MPC member and Director General of the West African Institute for Financial and Economic Management, Professor, Akpan H. Ekpo, said the CBN had better retain the rates at the moment because whatever decisions taken may have very minimal impact at the moment.

He said at the period of recession like now, monetary policies have less impact. The only thing needed to reflate the economy are drastic fiscal measures.

He said one way the MPC would make some impact now is to cut down drastically the MPR or benchmark interest rate from the current 14 percent to about 8 percent. “And I am sure they won’t do that at the moment.”

Ekpo urged the CBN to ensure that all the intervention funds are fully channelled to the right people.

He also suggested that the monetary policy authorities should ensure the reduction of the multiple exchange rates markets quickly and ensure massive injection of forex to stabilize the local currency.

Similarly, analysts at FSDH Merchant Bank said: “We expect the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to hold rates at the current levels when it meets on January 23-24, 2017. Although the inflationary pressure and weak exchange rate justify a rate hike, it may be a difficult policy given the need to implement policies to boost growth in the economy.”

They also noted that the CBN would continue to use the Open Market Operations (OMO) to manage liquidity to achieve the desired goals in the short-term.

At its November 2016 meeting, the MPC maintained the Monetary Policy Rate (MPR) at 14%, with the asymmetric corridor at +200 basis points and -700 basis points; and retained the Cash Reserve Requirement (CRR) and Liquidity Ratio (LR) at 22.50% and 30% respectively.

According to the analysts, “The new administration in the US led by Mr. Donald Trump had promised to embark on expansionary fiscal policy to build infrastructure and lower taxes.

“This policy may drive inflation rate in the US beyond the 2% target set by the Federal Open Market Committee (FOMC) of the US Federal Reserve (The Fed).

“The FOMC may respond by a rate hike faster than earlier anticipated. Consequently, global yields may rise with a possible capital flight from other countries into the US. The appropriate monetary mitigant in Nigeria under this situation is a tight monetary policy.”

Also, analysts at Financial Derivatives Company (FDC) in their projection said: “We do not expect the Monetary Policy Committee to make any significant adjustments to rates in its meeting this month. Thus, interest rates are projected to remain within the band of 7% – 12% for the rest of January.

“Yet, due to the rising government-debt burden, the CBN might intervene in the market to push down T/Bills rate. They could adopt signalling methods towards the end of Q1.”

For analysts at Afrinvest, the MPC meeting is coming against the backdrop of tightening external market for trade and capital, underlined by the US Fed hike in interest rate in December 2016 (and rise in fixed income yields) which they believe would subdue capital flows into emerging markets and developing countries in 2017, whilst the uncertainties surrounding the implementation of BREXIT remained a concern.

Also, the emergence of Donald Trump as President of the US and the possibilities of heightened geopolitical tensions and trade wars linger as markets await a clear fiscal and trade policy from him.

The analysts argued that, despite the instability in macroeconomic variables, they did not expect a tweak in policy rates given the limited scope for easing or tightening and reluctance of the central bank to shift FX rate peg.

However, subsequent meetings from March would be decisive as base-effect set in from February to moderate inflation rate, testing the resolve of the CBN to abide by the inflation-targeting thrust it committed to in 2016.


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