Rates, inflation top agenda as CBN committee meets

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Regulator to retain high benchmark rate over high prices
Foreign exchange crisis, rising consumer prices and artificial lending rates set by commercial banks will remain the priority of monetary policy makers as they resume meetings today. The Central Bank of Nigeria (CBN) says it is not considering reduction of the two-digit benchmark rate it set 12 months ago — 12 per cent in March 2016 and 14 per cent since July.

The meeting, which is the last for the year, with an18.3 per cent inflation on hand, will set the tone for the financial system until January 2017, when it would be reviewed.

Inflation, as reflected in rising prices of goods and services, has been blamed on pass-through cost from high exchange rates on importation of items and associated raw materials. Real sector operators complain of poor funding and high cost of borrowing money from banks. The average interest on loans stand at 22 per cent – eight per cent more than what banks pay to the regulator for money, and 19 per cent higher than what depositors get for keeping funds with commercial banks.

With inflation at 18.3 per cent, there is anxiety among policy makers and private sector operators that the rate of increase in prices of goods and services could accelerate and further encourage banks to set higher rates for loans, with much more devastating impact on costs.

Interbank foreign exchange rates have remained stable at N305.7 per dollar for a long time and the parallel market, where all the “ineligible 41 items” are funded together with shortfalls from the official market, have for a long time been at N460 on average.

With sustained high exchange rates, pump prices of petroleum products are projected to increase, a situation that could worsen inflation.

While the inflation level has been on month-on-month rise throughout the year, the Monetary Policy Committee (MPC), the decision making organ of the CBN, which sets the Monetary Policy Rate (MPR) — the benchmark rate for banks’ lending — has resisted interest rate adjustment since its July meeting.

There have been mixed opinions on the issue, with some calling for rate reduction despite rising inflation and foreign exchange crisis, while latest economic reports hint of possible rate hike.

Meanwhile, the expectations of interest rate reduction at the end of the MPC meetings due to begin today may not materialise going by projections from economic analysts.

Governor of the CBN), Godwin Emefiele, has said that “as an individual,” reducing interest rates was one of his cardinal missions, but that it is important to discuss the “issue based on facts, rather than politics and/or emotions.”

He said that calls by notable persons and groups to reduce the country’s high lending rates, may not be possible now, especially with the level of inflation already synonymous with stagflation — a twin issue of rising prices and unemployment rate.

“For those who say we need a rate cut to spur growth, we need to remind them that high inflation is highly inimical to economic growth. With ours at 18.3 per cent, one must question the judgment of cutting interest rates at this time,” he said.

Managing Director of Cowry Asset Management Limited, Johnson Chukwu, also told The Guardian that the policy makers will leave the rates steady, adding that it would not help matters.

For him, the policy makers should focus on growth rather than price stability that has already worsened due to inflation.

He said with third quarter report being on the corner, still with negative sentiments, there is need to think growth to avoid entering depression.

Since the last MPC meeting in September, the global risk landscape and policy outlook have changed dramatically, particularly with the emergence of Donald Trump as President-elect of the United States.

This has sent shockwaves to the global bonds market, risk-on appetite in the United States and underperformance of Emerging Markets assets, where Nigeria belongs.

The President of Chartered Institute of Bankers of Nigeria noted that while some political and economic actors are yet to come to terms with the election result, it is another testament to the need to revisit the globally entrenched political and economic theories.

“The US President-elect’s policies and economic direction would, for now, continue to be a matter of conjecture. Wherever Mr. Trump’s policies’ pendulum swings, the whole world would feel the impact due to globalisation and contagion effect,” he said.

For analysts at Afrinvest Securities Limited, domestic macroeconomic challenges– negative growth, constraining fiscal space, high inflation and forex illiquidity will dominate MPC deliberations.

“Key macroeconomic indicators have continued to show the sub-optimal performance of the economy and financial markets. Persistent rise in prices ensured inflation continued to gallop within the period as October.”

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