Update: CBN retains lending rate at 12%, anticipates liquidity risks in economy

Central Bank of Nigeria

With a vote of seven members to three, the committee also left the Cash Reserve Requirement, CRR, unchanged at 12 per cent.

The Monetary Policy Committee, MPC, of the Central Bank of Nigeria, CBN, on Tuesday resolved to retain the Monetary Policy Rate, MPR, the benchmark rate for banks to lend to their customers at 12 per cent in almost one and a half years with a corridor of +/-200 basis points around the midpoint.

With a vote of seven members to three, the committee also left the Cash Reserve Requirement, CRR, unchanged at 12 per cent and Liquidity Ratio at 30 per cent, with the Net Open Position at 1.0 per cent.

The Central Bank Governor and Chairman of the Committee, Lamido Sanusi, told reporters at the end of the meeting that members also gave a projection on the impact of the recent declaration of emergency rule in three northeastern states by the Federal Government, warning that the decision may trigger increased spending by government causing liquidity risks in the economy.

According to Mr. Sanusi, the backlash from the decision, meant to curb the activities of armed insurgents in the northern part of the country, may necessitate a reaction by the Central Bank to tighten the MPR if there are serious risks on the fiscal side.

“The recent military action in the North-East will result in additional spending,” Mr. Sanusi said. “Although the government has announced that there will be no supplementary budget, the Coordinating Minister for the Economy and Minister of Finance (Ngozi Okonjo-Iweala) has already announced that there will be a drawdown on a Contingency Vote embedded in the 2013 Budget to cover emergencies. Overall, the committee is of the view that government spending will constitute a major risk to the inflation and exchange rate outlook, thus advising prudence in monetary policy action at this time.

“Personally, I don’t think we should change rates for the sake of changing rates. I think we should respond to situations. The government will spend money. We will keep monetary policy very tight. If the spending gets excessive, we will respond appropriately. The risks, if there is any from the fiscal side, is that we may actually have to tighten policy further if this warrants. I don’t think that at this point in time, a reduction in rates is not imminent”, he added.

Mr. Sanusi also said the committee noted that in spite of increased borrowings, yields on FGN bonds have been declining steadily, signaling the impact of increased inflows while equity prices have been on a upward trend. He added that the evidence does not, therefore, support claims of monetary policy being too tight.

According to him, the committee was of the opinion that the principal risks to long-term stability could be addressed through diligent implementation of sound policies of fiscal consolidation and efficient sectoral policies underpinned by structural reforms, since they are required to attract long term foreign capital inflows that would make the gains of monetary policy sustainable, and also support credit extension to the private sector players.

AMCON

The Central Bank Governor also disclosed that by December this year the Asset Management Corporation of Nigeria (AMCON) would pay off N1.1 trillion of its N3.6 trillion debt, urging Nigerians not to be worried about the operations of the company due to its huge debt portfolio.

“AMCON has over N800 billion in assets, and at the end of this year, it will build that up to over a trillion Naira. AMCON has series one bonds maturing in 2013 and also series 2,3 and 4 maturing in 2014. AMCON will issue a new bond of N3.6trillion, which we will invest in and that will be used to refinance our entire exposure at an interest rate of 6 per net over 10 years,” he said.

He said the other creditor to AMCON would be those holding series 5 bonds that would be maturing in October 2014, adding that AMCON would build up the balance from the sinking fund and pay them off in 2014, while the Central Bank would be the only creditor to AMCON, with other person holding AMCON bonds paid off as at when due.

“This pay off will not be in the form of an injection of N1 trillion cash into the system. We already compelled AMCON to convert them into securities. So these securities are going to change. So, what we are going to have is that by December, the balance sheet of AMCON will reduce by N1.1 trillion. And by October next year, the balance sheet will shrink by another N1 trillion, down to N3.6 trillion,” he said.

Mr. Sanusi said a number of initiatives were being undertaken at the structural side of the economy, pointing out, however, that for the nation to achieve inclusive growth, a lot more needs to be done, like proper implementation of reforms in the power sector and petroleum industry.

He noted that Nigeria cannot continue importing petroleum products and other consumer goods, including food and expect inclusive growth. He pointed out that monetary and fiscal policies could only provide a stable environment but that in the final analysis growth would be engendered in the economy through a combination of structural and fiscal policy reforms.

“So it is about when the government begins to spend less on overhead and other expenditure and spend more on capital projects. We will begin to have the reforms that will bring private investments to those areas that will bring capital formation and investments, use of technology that is when we will get inclusive growth. It is not something you get by tinkering with money supply or the rate of interest,” he said.

Anticipated decision

Finance experts, reacting to the development, have expressed views that the MPC’s decisions were quite anticipated.

Bismarck Rewane, Managing Director, Financial Derivatives Company, a diversified financial institution, said ‘MPC is now predictable’.

“Once again, the Monetary Policy Committee (MPC) left the benchmark interest rate unchanged at 12 per cent per annum. All other instruments for complementing monetary policy were untouched. A decline in GDP growth rate was not enough to move the votes in favour of MPR reduction,” he said.

According to him, several central banks in Africa are also maintaining a tight rein on inflation like their counter-parts in other regions. The Central Banks in Angola, Ghana, South Africa and Uganda held interest rates at 10%, 15%, 5%, and 12% respectively.

He added that, similar to previous meetings, the MPC’s decision was dependent on factors such as inflation rate, oil revenues and exchange rates.

“The Hawks in the MPC emphasized that a sustainable inflation trend is a necessary condition before the benchmark interest rate can be altered. So far in 2013, the inflation rate has been fluctuating. It rose to 9.1% in April from 8.6% recorded in March. A prolonged security crisis in the North would affect supply of food items and cause a further rise in food prices. The potential increase in inflation rate was a major concern during the MPC meeting”.

He said the decline in oil proceeds are pointers to the risks posed to Nigeria’s government revenue framework, forex inflows and external reserves and that exchange rate volatility continued in the forex market since the last MPC meeting which resulted in an increase in Central Bank’s intervention to keep the naira stable.

“In our view, there will be no impact in the money market since rates are already disconnected from the MPR. However, there may be increased portfolio inflows in the capital and forex market, following the recent interest rate cut in Europe. The entry of foreign capital in the forex market will continue to help maintain a strong and stable naira” he said.

He said in terms of growth, maintaining a tight monetary stance would continue to slow down credit to the private sector and stifle growth.

“Already, the National Bureau of Statistics reported a decline in GDP growth from 6.99% in Q4’13 to 6.56% in quarter one 2013. This downward trend would continue if the MPC fails to pay heed to the call for stimulus” he said.

Renaissance Capital, an investment bank, also said the MPC’s decision was expected.

“As expected the MPC elected to keep the monetary policy rate (MPR) unchanged at 12.0%. This is positive for the naira. The MPC’s decision was in accordance with our expectation and the consensus view. Governor Sanusi says he sees no reason to change a policy that is working and does not believe that monetary policy is too tight” the firm said.

The firm said the MPC believes the outlook remains relatively benign and expects inflation to remain in the single digits (in short term), is pleased with the macroeconomic stability, but is concerned that emergency rule in the north may hurt agriculture.

“The MPC expressed concern about the uncertainty in the oil industry and the sector’s prospects, likely due to the drop in output since 4Q12. It also believes government spending is a risk to inflation and thinks military action in the north may boost spending. We infer from this that they consider the increased spend a possible risk to the inflation outlook” the firm said.

“Although the MPC’s inflation outlook remains benign, we believe the increased risk to the naira due to a weaker oil sector as well as the risk of an increase in government spending related to military spend in the NE of the country, reduces the likelihood of the MPC loosening monetary policy in the short term” it added.

The MPC met on May 20 and 21, 2013 with 10 out of the 11 members in attendance. The Committee reviewed the conditions and challenges that confronted the domestic economy in the first five months of 2013, and reassessed the short-to-medium term monetary policy options in the light of the fragile global economic and financial environment.

The Committee noted that one of the members, Professor Sam Olofin, has left the Board of the Central Bank and, therefore, ceases to be a member of the MPC. The Committee recognized his tremendous contributions to its deliberations over the years and thanked him for his services.


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