Experts undecided on fate of policy rate

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Finance experts are
undecided about the fate of Nigeria’s Monetary Policy Rate (MPR) after
the Monetary Policy Committee (MPC) meeting scheduled to be concluded
today.

The monetary policy
rate is the process whereby the Central Bank controls the supply of
money, often targeting a rate of interest for the primary purpose of
promoting economic growth and stability.

Yvonne Mhango, a
finance analyst at Renaissance Capital, an investment bank, says
strengthening food and fuel prices and the potential for fiscal
indiscipline, owing to strong oil prices, have increased the upside risk
to the inflation outlook and this needs to be addressed.

“We are of the view
that Nigeria’s Monetary Policy Committee (MPC) should hike the Monetary
Policy Rate (MPR) on 22 March 2011 by a further 25 basis points to 6.75
per cent.”

According to her,
the MPC increased the policy rate by 25 bpts to 6.5 per cent at the last
meeting on 27 January on the back of upward risks to inflation stemming
from strong commodity prices, election related expenditure, and fiscal
injections related to Asset Management Company of Nigeria.

The Central Bank had
on several occasions recognised the extended threat from uncoordinated
fiscal-monetary stance in distorting price signals, stressing the
inflationary impact of the relatively high share of recurrent
expenditure in the 2011 budget, and has also noted inflationary
pressures arising from domestic factors such as the minimum wage issue,
election driven spending, and the prospect of fuel price deregulation.

However, despite this, some experts do not recommend a further tightening of the nation’s policy rate.

“Though the Central
Bank should raise its benchmark interest rate by 100 basis points by
end-2011, an immediate tightening (at the March 21st MPC meeting) would
put the already jittering domestic money market rates on an upward
trajectory.

“We expect CBN to
allow some of its recently introduced liquidity management measures
(introduction of cash reserve requirement averaging) and the proposed
commencement of Forex forward sales to take full effect on the economy,”
Access Bank’s research team said in its usual pre MPC report issued
yesterday.

According to the
report, a benchmark rate hike is effective if inflation is due to excess
liquidity in the system, as previous rate hikes had varying impacts on
short-term interest rates, depending on liquidity levels and market
reaction to change.

“A pre-emptive hike
in Monetary Policy Rate (MPR) may be contemplated to curb money growth
arising from other non-structural causes of inflation in the country,
since monetary policy impact on monetary aggregates with a lagged
effect,” it further said.

The team also argued
that the Central Bank governor has explained in a recent interview that
a hike in MPR would not have impact on inflation in the short-term if
energy and food price increases are the drivers of the inflation:
depicting structural misalignment.

“Hence, our position
is that the Committee would decide to keep its key rate unchanged at
6.5 per cent, until broad-based macroeconomic stability is achieved,
while the Central Bank would sustain its efforts at finding other
innovative ways to unlock the credit market and stimulate the economy,”
it concluded.

Samir Gadio,
emerging market strategist, Standard Bank, says a hike in the rates
would be consistent with the ongoing monetary tightening initiated and
pursued during the MPCs held in September, November, and January, after
the Central Bank ended the expansionary stance that it had implemented
in the aftermath of the global economic crisis and as systemic risks in
the domestic financial industry came to the fore.

“This would also
reflect the Central Bank’s desire to trim down negative real interest
rates and address structural imbalances between borrowers and savers in
the economy, although it remains to be seen whether such a course of
action would have an impact on savings rates based on previous
experience.

“Still, we think it
is possible to somewhat converge to a real rate regime and reduce
inflation by adopting the geometric mean approach. Besides, the
inflation path in Nigeria is more sensitive to exchange rate
fluctuations, given its predominantly exogenous nature than interest
rate decisions because of the weakness of the monetary policy
transmission mechanism,” Mr. Gadio said.

“In our view, there
is a 65 per cent probability that the MPC will raise the Monetary Policy
Rate (MPR) by 25-50 bps from the current 6.5 per cent and subsequently
increase the standing deposit facility and standing lending facility
rates,” he added.

The Monetary Policy
Committee (MPC) is scheduled to conclude its second meeting for the year
today, to review the country’s macroeconomic situation against
developments in the global economy.


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