MPC: CBN committed to promoting macroeconomic stability – Emefiele

The Monetary Policy Committee of the Central Bank of Nigeria (CBN) held its meeting on September 25-26, 2017 and issued its 115 communiqué. The CBN governor, Godwin Emefiele spoke on all the decisions of the committee in the communiqué.

 SIMON UGWU reports

The Monetary Policy Committee met on the 25th and 26th of September, 2017 against the backdrop of a relatively optimistic global economy.

The Committee examined the global and domestic economic and financial environments up to the third quarter of 2017, and the outlook for the rest of the year. The recent spate of flooding and hurricanes in some parts of the globe; the flooding in Nigeria; the increasing tension between the US and North Korea, and the perception of hostilities on the Korean Peninsula as well as the associated geo-political tensions, were identified as key risks to global output growth.

On the domestic front, the economy exited recession (which began in the first quarter of 2016) in the second half of 2017, with a modest positive short to medium-term outlook, resulting largely from deliberate macroeconomic stimulus and a stable naira exchange rate. Inflation expectations also appeared anchored on the strength of prevailing tight monetary policy stance.

It is worthy of note that the  MPC voted to retain the MPR at 14.0 per cent;  retain the CRR at 22.5 per cent; retain the Liquidity Ratio at 30.0 per cent; and retain the Asymmetric corridor at +200 and -500 basis points around the MPR.

External Developments

The MPC, however, noted some headwinds confronting the optimistic global growth prospects to include: recent developments on the Korean peninsula; the damage to infrastructure caused by hurricanes – Harvey, Irma and Maria; the lull in BREXIT negotiations and the normalization of monetary policy by the US Fed, which is expected to instigate global capital flow reversal. Other challenges include the continued slow pace of recovery in global oil and other commodity prices and China’s reduction in uptake of global commodities. In addition,

The trend towards convergence

 The Committee noted the trend towards convergence between the rates at the bureau-de-change (BDC) and the Nigeria Autonomous Foreign Exchange (NAFEX) segments, as well as the stability of the exchange rate at the inter-bank segment of the 7 foreign exchange market during the review period. Similarly, the Committee noted the success of the Investor and Exporters’ window (I &E) of the foreign exchange market and traced this not only to foreign investor confidence but also to the zeal and commitment of Nigerian exporters who have demonstrated preference for the window to the parallel market. The Committee observed that the I&E window has increased liquidity and boosted confidence in the market with over US$7.0 billion inflow in the last five months. The Committee will continue to introduce policies that will improve the confidence of foreign investors in the country’s macroeconomic management regime.

Overall Outlook

 Overall Outlook and Risks Available data and forecast of key macroeconomic variables indicate a relatively positive outlook, predicated on existing policy initiatives including the ERGP. Other potential drivers of economic recovery are; the expected increase in government revenue arising from favourable crude oil prices, stable output, and general improvements in the non-oil sector, especially, agriculture, industry and construction. The intervention by the CBN in the real sector is expected to continue to yield positive results in terms of output and lower consumer prices. The Committee, however, noted some downside risks to the overall short- to medium-term positive outlook for the economy. These include; flooding which displaced farming communities and 8 political agitations. On the external front, the hawkish policy stance in the United States, rising geo-political tensions and sluggish output recovery in the Euro-area and Japan, could slowdown the momentum of global output growth, with significant spillovers to emerging markets and developing countries, including Nigeria.

 Considerations of the Committee

 The Considerations of the Committee The Committee applauded the exit of the Nigerian economy from recession but observed that the growth remains fragile and, therefore, hopes that complementary fiscal and monetary policies would sustain the growth momentum. The Committee further expressed satisfaction with the gradual, but consistent decline in inflation, noting, however, the substantial base effect in addition to the continuous improvement in the naira exchange rate across all segments of the foreign exchange market; and considerable improvement in foreign capital inflow. The Committee welcomed the steady implementation of the 2017 Budget, especially, the capital component of the budget, and urged increased momentum in expenditure directed at the growth-stimulating sectors of the economy in order to reduce youth unemployment and restiveness.

Expression of concern

 The Committee, however, expressed concern on the sustained pressure on food prices, noting risks posed by floods, strikes and insurgencies in various parts of the country to food production and 9 distribution. Regarding the tepid turnaround in economic activities in the second quarter of 2017, the Committee emphasized that the employment gains of recovery were still minimal, noting that a number of important job elastic sub-sectors were still weak and may require more fiscal support to regain traction.

  The Committee restated its commitment to maintaining stability in prices, without which meaningful recovery cannot be achieved. In this regard, members welcomed the gradual narrowing of rate spreads in the foreign exchange market and urged the Bank to continue to monitor and respond proactively to threats and vulnerabilities in the foreign exchange market. On the outlook for financial stability, the Committee noted that, in spite of the banking sub-sector’s resilience, the weak macroeconomic environment has continued to impact negatively on the stability of the sub-sector. The Committee reiterated its call on the Bank to sustain its surveillance of deposit money banks (DMBs) activities for the purpose of prompt identification and mitigation of potential vulnerabilities. The Committee also called on the DMBs to support the quest to move the economy forward by extending reasonably low priced credit to the private sector.

 Committee’s Decisions in arriving at its decision

The Committee’s Decisions In arriving at its decision, the Committee took note of the gains so far achieved as a result of its earlier decisions; including the stability in the foreign exchange market and the moderate reduction in inflation. The option was whether to hold, tighten or ease. These were subjected to extensive debate. As in previous meetings, although tightening would help rein in inflation expectations and strengthen the stability in the foreign exchange market, the Committee felt that it would further widen the income gap, depress aggregate demand and adversely affect credit delivery to the private sector.

 The Committee also noted that tightening may result in the deposit money banks re-pricing their assets and loans, thus raising the cost of borrowing and therefore heightening the already weak investment climate and nonperforming loans. With respect to loosening, the Committee believed that although while it would make it more attractive for Nigerians to acquire assets at cheaper prices, thus increasing their net wealth, and therefore stimulate spending as confidence rises, it nevertheless, felt constrained that loosening at this time would exacerbate inflationary pressures and worsen the exchange rate and inflationary conditions. The Committee also felt that loosening will further pull the real rate deeper into negative territory as the gap between the nominal interest rate and inflation widens.

However, overall, majority of the members expressed a strong commitment to policy flexibility that would allow the Committee to promptly take the necessary actions that would promote overall macroeconomic stability and engender sustainable growth.