Why MPC withdrew from further monetary policy tightening —Experts

A herd of finance and economic experts have explained why all the members of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to refrain from further tightening of monetary policy.

The CBN has been maintaining a non-expansionary monetary policy stance in recent time.

According to the experts drawn from different investment banking and fund management firms, the decision was taken  to support the attainment of domestic economic growth projection of 1.75 per cent.

This was because growth rate slowed to 1.50 per cent in the second quarter (Q2) 2018 from 1.95 per cent in Q1 2018.

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Experts from Cowry Assets Management Limited  believe that inflationary threats from end of year spending activities (from election campaigns and Christmas festivities) as well as expected  Foreign Portfolio Investment (FPI) outflows (in response to expected  increases in US Fed rate) could be tamed using Open Market Operation (OMO).

Hence, “we expect a status quo policy pronouncement when next the MPC meets in January 2019 – despite upside risk to inflation from expected increase in political spending as such risk should be short-lived,” says Cowry Assets dealers.

Also, in a note to clients, experts from a Lagos-based investment banking and securities firm, Afrinvest (West) Africa Limited is of the view that while these decisions were consistent with the outcome of all meetings since July 2016, the unanimous vote was surprising.

“We suspect that the bank’s moderate economic growth forecast of 1.75 per cent in 2018, lower than IMF’s 1.9 per cent and Afrinvest’s 2.1 per cent growth estimates, prompted this stance. Furthermore, we observed that the tone of the Apex Bank’s policy announcements slightly softened and tilted towards growth rather than the usual focus on stable capital flows and price stability,” Afrinvest stated.

In a related note, the committee expressed worry about the slow expansion in credit to the private sector which experts believe is reflected in soft spending by consumers and businesses.

Given that low credit to the real sector led to the recently proposed dynamic Cash Reserve Requirment (CRR) framework and the corporate bond repurchase programme, “we are surprised that there was no statement on the progress so far.”

Moving forward, the firm expects the CBN to continue to manage system liquidity to guide desired rates in the fixed income market. While this may be insufficient to stem capital flow reversals ahead of the elections, the recently issued US$2.8billion Eurobonds provide additional buffers for the CBN to sustain foreign exchange sales and, in turn, exchange rate stability in the near-term.

The measures of money supply being tracked by the MPC according to the experts,  have underperformed estimates for the year. Instead, elevated headline inflation has been driven by factors such as insecurity in the North-Central and flooding which have affected food prices, as well as high transportation and energy prices.

“We note that policies to resolve these issues and to ensure ease of doing business are within the control of policymakers on the fiscal side,” Afrinvest stated.