Nigerian Rising inflation, declining growth: Will MPC do nothing?

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) meets today to consider recent development in the economy especially the twin challenges of rising inflation and decline in economic growth rate. However, the expectation is that the committee will likely adopt and a wait- and- see’ posture rather than adjust its monetary policy or introduce new measures. At the end of its last meeting in 2015, the MPC ended its four years of monetary tightening and decided to relax money supply with the aim of stimulating economic growth. Consequently, it decided to: Reduce the Cash Reserve Ratio (CRR) from 25.0 per cent to 20.0 per cent; Reduce the Monetary Policy Rate (MPR) from 13.0 per cent to 11.0 per cent; Change the symmetric corridor of 200 basis points around the MPR to an asymmetric corridor of +200 basis points and -700 basis points, around the MPR. Photo: toonpool This decision, according to the CBN Governor, Mr. Godwin Emefiele, was prompted by, “Weakening fundamentals of the economy, particularly the low output growth, rising unemployment and the uncertainty of the global economic environment”. But at its first meeting of this year, in January, the Committee adopted a wait-and-see attitude, stressing the need to allow time for policy changes made in 2015 to impact the economy. Declining Growth & rising inflation Discussions at this week’s MPC meeting would focus on the fourth quarter 2015 Gross Domestic Product (GDP) data and February Inflation data recently by the National Bureau of Statistics (NBS). According to the NBS, GDP growth rate dropped to 2.11 percent from 2.84 percent recorded in the third quarter. Thus the economy grew at an average rate of 2.77 percent in 2015, down from an average of 6.22 percent in 2014. The February inflation report however showed that inflation rate rose to a three year high of 11.38 percent, courtesy impact of sharp depreciation of the naira on prices of goods and services. Besides exceeding the single inflation rate threshold of the CBN, the February inflation figure surpassed the 10 percent predicted by Financial Derivatives Company (FDC). While the GDP data for Fourth quarter of 2015 reinforces the need for policy measures to stimulate growth, as decided by the MPC at its November 2015 meeting, the February inflation data, according to Cowry Asset Management Limited, “Put question on the current monetary policy thrust of the CBN which appears to have given up the objective of price stability for an “induced” FX stability, trade protectionism and stimulating domestic manufacturing growth.” According to, a bank treasurer and official of Financial Market Dealers Association of Nigeria (FMDA), “Ordinarily the MPC would have continued with its decision to relax monetary policy by further reducing the MPR, or the Standing Deposit Facility (SDL) rate, but with the February inflation date, it is not likely they would do so”. Comments from MPC members From the personal statements of MPC members at the January meeting, it is obvious that, they were resolute about the need to stimulate the economy. The personal statements also reveal that they were obvious that this policy direction would have some negative side effects including possible rise in inflation rate. “According to Deputy Governor, Corporate Services, CBN, Mr. Bayo Adelabu, “From the monetary side, the teething issues could always be addressed by fine-tuning some measures without altering the strategic goal of policy, which is the need to support the real sector and promote inclusive growth.” Another MPC member, who is not on the board of the CBN, Mr. Uche Chibuke, stated, “Some of these costs are already obvious and are bound to increase in the future. Statistics available to MPC, for instance, clearly show that inflation is already inching upwards and approaching double digit territory. The implementation of the 2016 budget will only cause the inflation problem to get worse. Based on the above dynamics; the biggest challenge for monetary policy in my view is how real sector development can be encouraged in the face of rising inflation.” With these comments, MPC members may not be in the mood to consider a resumption of monetary tightening to rein inflation. The enormity the enormity of the increase in inflation rate also makes it less exciting to consolidate on the pro growth measures and it is worrisome especially to investors as it reduces real interest rate or returns on financial assets, thus stimulating desire for upward review of the MPR to ensure investors earn positive returns on their investment. Policy Options Based on the above, Analysts at Afrinvest, stated while there are three options for the MPC, there is high probability the Committee will decide to do thing by retaining it policy stance. They stated, “We expect the MPC to decide between; Holding all rates constant and continue to harp on structural reforms and policy coordination with the fiscal arm; Adjusting the MPR upwards by 100bps – 200bps to compensate investors for lowered real return and attract foreign private capital; Increase the Standing Deposit Facility (SDF) rate by 200bps, while leaving other rates constant, to force an upward movement in the yield curve and mop up liquidity in the financial system. ‘Whilst acknowledging the need to compensate investors for the depressed real return, we have placed an 80 percent probability on option 1 and 10 percent apiece on Options 2 and 3 due to 1).

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