Experts criticise the CBN’s decision to maintain the Monetary Policy Rate

A reports by a respected financial institution has warned the Central Bank of Nigeria that it has to change its policy direction for 2013 if Nigeria’s economy was to grow.

The report follows the decision by the Monetary Policy Committee of the Central Bank to maintain the nations Monetary Policy Rate, MPR, at 12 per cent.

“The sustainability of a contractionary stance and its stifling impact on growth and the economy justifies the need for a change in policy direction,” a report from Financial Derivative Company, FDC, a diversified financial services institution stated.

“All pointers are in favour of an end to the Central Bank’s tight monetary policy stance and the need to boost growth and lending to the real sector,” it stated.

The report also stated that the current contractionary policy stance has been in play since October 2011 when the MPR was raised by 275 basis points.

“Our view is that the overdependence on interest rates as a tool for adjustment is precarious. In 2013, the CBN (Central Bank) will have to moderate its stance to allow the interest rate decline and exchange rate depreciate,” the firm said.

The Monetary Policy Committee on Monday left its benchmark interest rate unchanged at 12 per cent per annum during its last meeting for 2012. Other policy instruments such as the Cash Reserve Ratio and Net Open Position were left unchanged at 12 per cent and 1 per cent respectively.

Nigeria’s annual inflation rate increased by 0.4 per cent to 11.7 per cent in October, primarily as a result of exceptional factors such as the flooding which resulted in an increase in food inflation to 11.1 per cent.

The impact of the flooding in 12 states of the country was immediate but was not as severe as expected. Core inflation declined for the 4th consecutive month to 12.4 per cent.

According to the Central Bank, developments in the domestic economy in the past three months highlight some new pressure points to macroeconomic stability.

The regulatory body said the average maximum lending rate increased from 23.45 per cent in July to 24.65 per cent in October, and added that it was concerned that the moderation in money market rates was only beneficial to prime customers, who enjoyed a fair degree of reduction in rates on their loan

facilities.

The apex bank also stated that the MPC was of the view that despite the high interest rates, additional shocks to the economy emanating from the devastating floods, imported inflation, and the upward adjustment in electricity tariffs continue to stoke inflationary pressure.

There were also concerns on conflicting price signals coming from the latest inflation numbers from the National Bureau of Statistics, with headline and food inflation trending upwards, while core inflation rate continued to moderate for the fourth consecutive month.

It also said that the fact that leading economic indicators have remained positive for two months and the Gross Domestic Product, GDP, growth figure for the third quarter came in lower than the previous year at 6.48 per cent, sends mixed signals on the direction of the Nigerian economy.

This according to the Committee created uncertainty as to the appropriate policy stance at this time.

The Central Bank Governor, Sanusi Lamido, said the Committee had to choose among three options: An increase in rates in response to the up-tick in headline and food inflation; A reduction in rates in view of declining core inflation and GDP growth; or Retaining current monetary policy stance in view of conflicting price signals and global uncertainties.

He added that the committee, by a unanimous vote, decided to maintain the monetary policy rate.