Four months after the Monetary Policy Committee (MPC) reduced interest rates, it has reversed its decision and increased Monetary Policy Rate or interest rates bank lend money to 12 percent.
Addressing journalists at the end of the two days MPC meeting in Abuja Tuesday, the governor of the Central Bank of Nigeria (CBN) Mr Godwin Emefiele said “the Committee, in its assessment of relevant internal and external indices, came to the conclusion that the balance of risks is tilted against price stability. The MPC therefore, voted to tighten the stance of monetary policy.”
Based on this, the MPC raise MPR by 100 basis points from 11.00 per cent to 12.00 per cent; Raise the Cash Reserve Ratio (CRR) by 250 basis points from 20.00 to 22.50 per cent; retain Liquidity Ratio at 30.00 per cent; and narrow the asymmetric corridor from +200 and -700 basis points to +200 and -500 basis points.
Before arriving at this decision, Emefiele stated that “the Bank had adopted accommodative monetary policy since July 2015 in the hope of addressing growth concerns in the economy, effectively freeing up more funds for DMBs by lowering both CRR and MPR, with excess liquidity arising from the lower CRR warehoused at the CBN.”
Emefiele noted that Deposit Money Banks (DMBs) were to access these funds by submitting verifiable investment proposals in the real sector of the economy.
He however lamented that “the funds have not impacted the market yet because the CBN was still processing some of the proposals submitted by the DMBs. In the first episode of easing which resulted in injecting liquidity into the Banking system, DMBs did not grant credit as envisaged.”
The CBN governor added that, “the delay in passage of the 2016 Budget has further accentuated the difficult financial condition of economic agents as output continues to decline due to low investment arising from weak demand.”
“The cautious approach to lending by the banking system underpinned by a strict regulatory regime conditioned by the Basel Committee in the post global financial crisis era has further alienated investors from access to credit as banks prefer to build liquidity profiles in anticipation of government borrowing,” he said.
The Committee noted that the sluggish growth in output was partly attributable to “certain fiscal uncertainties, which inadvertently hampered investment spending and flows; intermittent fuel scarcity, increased energy tariffs (without commensurate improvement in power supply), foreign exchange scarcity as well as slow growth in credit to private sector in preference to high credit growth to the public sector.”
The Committee noted that many of these factors were outside the control of monetary policy and given these limitations, in the absence of complementary fiscal and structural policies, the only option was to continue with the existing measures.
The MPC Emefiele said “believes that complementary fiscal and structural policies are essential for reinvigorating growth.”
The Committee reiterated its commitment to maintaining a stable naira exchange rate stressing that it “ took note of the high level of activity in the autonomous foreign exchange market as well as the rising demand in the interbank market but observed that the data on demand for foreign exchange had become ‘very noisy’, being overshadowed by speculative demand.”
However, the Committee charged the CBN “to speed up reforms of the foreign exchange market to improve certainty and eliminate noise and opportunities for arbitrage.”
On the monetary front, Emefiele, said, “the wider economy appears starved of the needed liquidity to spur growth and employment. Recent performance of the monetary aggregates lends credence to this fact. With the exception of credit to government, growth in all the monetary aggregates remained largely below their indicative benchmarks, yet; headline inflation spiked to 11.38 per cent in February 2016, substantially breaching the policy reference band of 6 – 9 per cent.”
The increase in inflation he said “was driven not so much by liquidity, but by structural factors such as fuel scarcity, increased electricity tariff, persistent insecurity, exchange rate pass through and seasonality of agricultural produce.”
Emefiele warned that “the conflicting signals from slowing growth and rising inflation present a difficult policy challenge.”
The CBN governor noted the limitations of monetary policy in influencing the drivers of the current price spiral, which led the Committee to stress the need to urgently address the key sources of the pressures. In this regard, the Committee reaffirmed its commitment to closely monitor the development while working with relevant authorities to address the structural bottlenecks.
The Committee also enjoined the relevant agencies to speed up passage of the 2016 Budget in order to halt the depressing effect of the uncertainty that engulfs the waiting period, hoping that the implementation of the budget would go a long way in boosting business confidence, and reinvigorating the financial markets. In the circumstance, the Committee urged the Bank to continue to upscale its surveillance of the financial system with the aim of promptly detecting and managing vulnerabilities to ensure sustained stability.
When asked what will happen to the $20 billion in some individuals’ domiciliary accounts, Emefiele said the money was not sitting idle in the banks but were being used by the banks to fund assets on the other side of the balance shot and constitute a liability in the banks’ balance sheets.