CBN and its monetary policy management

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) held its first meeting of fiscal 2017 on 23rd and 24th January 2017 against the backdrop of economic developments.

Over the last few weeks the pillars of the global old order – free trade, multilateralism, and globalization have come under intense pressure, and seemingly giving way to an era of enlightened national interest in the conduct of international economic relations.

On the domestic front, the economy remains in recession and inflation pressures have yet to recede. Both external and domestic conditions have blended to significantly complicate the policy environment. The committee reviewed the global and domestic economic and financial environments in 2016 and the outlook for the short to medium term in 2017.

The uncertainty in the external environment persisted owing to a combination of recent political and economic developments. The key issues include the rising wave of populist and anti-globalization sentiments anchored on emerging bilateralism, divergent monetary policy stance of the advanced central banks, and disorderly commodity price movements.

The MPC decided to retain the monetary policy rate (MPR) at 14 percent, the CRR at 22.5 percent, the Liquidity Ratio at 30.00 percent, and the asymmetric corridor at +200 and -500 basis points around the MPR.

CBN Governor, Godwin Emefiele, said the committee re-assessed the headwinds which confronted the economy in 2016 and the opportunities for recovery in 2017.

“In particular, the MPC 21 evaluated the implications of the rising wave of nationalistic ideologues across the West, the re-evaluation of trade agreements and the possibility of rapid monetary policy normalization in the United States, with adverse consequences for other countries, including Nigeria. The uncertainties underpinning the implementation of Brexit and the apparent retreat from globalization and free trade were also important points of reflection.  In recognition of the seemingly inevitable structural shift in the global economy, the committee reiterated the need to be more inward looking and hasten efforts towards economic diversification to support the domestic economy and improve life for the Nigerian people. Consequently, members acknowledged the imperative of sectoral policies and greater coordination of monetary and fiscal policy,” he said.

“Conscious of the prevailing market sentiments in favour of a rate cut, the committee reasoned that most of its decisions in 2016 were informed by the need to address the delicate balance between price stability and growth. Noting that the pressures on consumer prices were yet to abate and even as the economy continued to be in recession despite the intervention support by the Central Bank, the committee stressed that it was not oblivious of the full ramifications of the economic challenges facing the country. The MPC was concerned that the current situation was not amenable to simplistic analyses and quick fixes such as have found expression and increased attention at different fora and the media. The domestic economic challenges which include a chronically import dependent consumption culture, lack of competitiveness of many sectors of the economy and yawning infrastructural gap, have combined with an unfavorable external environment to complicate the macroeconomic policy environment,” he stressed.

“The Monetary Authority had on many occasions, and to the extent feasible, taken extraordinary steps to support other policies as well as compensate for aspects of structural gaps in the economy even at the expense of its core mandate.”

The governor pointed out that the committee specifically noted the positive contribution of agriculture to gross domestic product in the third quarter, mostly attributable to the bank’s interventions in the sector.

“The committee hopes that given the thrust of the 2017 budget and accompanying sectoral policies, output growth should resume in the short to medium term. The MPC, therefore, lends its voice to efforts for an early finalization of the 2017 Federal Budget by the authorities concerned, and the resolve to pursue a non-oil driven economy, as these will go a long way in stimulating aggregate demand and restoring confidence in the economy”.

The committee further urged the authorities to seriously consider using the Public-Private Partnership (PPP) model in its infrastructure development programme as a means of cushioning any possible shocks to budgeted revenue. The committee further noted that Inflationary pressures would begin to subside as non-oil output recovers and the naira exchange rate stabilizes. Until then, it stressed, a rate cut would worsen the inflationary conditions and undermine the current outlook for stability in the foreign exchange market.

The committee also feels that doing so would further aggravate demand pressures while undermining existing income levels in the face of the already expansionary monetary policy and increasing inflationary pressure which will make the economy unattractive for foreign and domestic investment. Given these limitations, the committee was reluctant to lower the policy rate on this occasion but remained committed to doing so when the conditions permit. From a financial stability standpoint, the committee noted the possible impact of the inclement macroeconomic environment on banking sector resilience.

The MPC urged the management of the CBN to engage industry operators in discussing likely issues of asset quality, credit concentration and high foreign exchange exposures. Given the growth in money supply arising from unconventional monetary policy operations of the bank and implications for price and exchange rate developments, the committee is committed to moderating growth in narrow money in the 2017 fiscal year in line with the bank’s monetary growth benchmarks. The committee, in consideration of the headwinds in the domestic economy and the uncertainties in the global environment, decided by a unanimous vote to retain the MPR at 14 percent alongside all other policy parameters.

The Governor further explained that the uncertainty in the external environment persisted owing to three combinations of recent political and economic developments. The key issues he listed as Brexit, the rising wave of populist and anti-globalization sentiments anchored by emerging bilateralism, divergent monetary policy stance of the advanced central banks and disorderly commodity price movements.

With global output growth improving sluggishly, he said the outlook for 2017 remains unchanged owing to persisting uncertainties in commodity prices and volatility in the financial markets as well as slowing demand in the advanced economies and the emerging markets.

The MPC welcomed the modest increase in oil prices following the Organization of Petroleum Exporting Countries (OPEC) decision to cut output and noted the increase in the policy rate of the US Federal Reserve Bank in December 2016 and the potential implications of that decision for international interest rates and capital flows.

“While noting the materiality of the output cut on oil prices,  the committee cautioned that the effect could rapidly wane, given the likelihood of a supply glut from non-OPEC members, low level of global economic activity and weak growth. Emerging markets and developing economies, in particular, have continued to confront strong headwinds such as low commodity prices, rising inflation, currency instability, intractable low aggregate demand and subdued capital flows. Overall, the committee noted that whereas improved commodity prices may provide modest tailwinds for resource dependent economies in 2017, the medium-term outlook continues to be muffled by stagnation and uncertainty in the prospects for global trade, subdued investment, and heightened policy uncertainty, especially in some major economies,” he said.