Inflation, effect of LDR in focus as MPC meets —Experts

LINGERING price pressures and the effect of recent directive to banks to increase lending- to the private sector are among major issues expected to dominate discussions at the Monetary Policy Committee (MPC) meeting scheduled to hold today (July 22) and tomorrow (July 23) experts have said.

The Central Bank of Nigeria (CBN) commences its two days monetary policy committee meeting to assess developments on both the domestic and global landscape, which experts at ARM pensions Research department said will inform its decision at the end of the meeting on Tuesday.

According to analysts, price pressures remain too high to bring inflation back into the target band of 6per cent to 9per cent in 2019 and 2020.

The CBN has made it clear that it’s keen to boost lending to help the Nigerian economy that is still struggling to recover from a 2016 contraction, but with sticky inflation and the need to attract foreign inflows to support the naira.

Hence the central bank has started to resort to other measures than interest rate cuts to boost credit growth.

The apex bank, according to experts, may wait to see the effect of new regulations, such as increasing lenders’ loan-to-deposit ratio (LDR), before it cuts borrowing costs further.

Going into the rest of the year, “we see less room for aggressive tightening, despite higher maturity profile in the fourth (Q4) of 2019, on the back of: dovish stance of major central banks in advanced economies indicating a less threat to the naira via Foreign Portfolio Investment (FPI) outflow and dissipating inflationary pressures in the coming month,” the ARM experts suggested.

Other stakeholders believe that tying this with CBN’s recent posture on persuading banks to give credit to the private sector means same posture trend will extend to the MPC’s decision at the end of its meeting on Tuesday, with model suggesting a 50-100 basis points (bps) reduction in the benchmark Monetary Policy Rate (MPR).

Inflation for the month of June eased to a 12-month low of 11.22 per cent year to year (YoY) (May: 11.4 per cent) largely on the back of lower food inflation.

In spite persisting conflicts in the Northern region, food inflation moderated 24bps to 13.6 per cent.

It should be remembered that within a space of two weeks, the CBN issued two different guidelines to the Deposit Money Banks (DMBs), an indirect move to induce banks to create credit to the private sector and support growth.

The first one entailed DMBs maintaining a minimum Loan to Deposit ratio of 60 per cent by the end of Q3 19, with the second coming in the form of a voluntary rejection of excess liquidity deposited by the banks to CBN via the Standard Deposit Facility.