The Central Bank of Nigeria (CBN), going into its fourth Monetary Policy Committee meeting this year on July 25 to 26, may need to be cautious of the impact of its decision on the stagnating economy, according to analysts and experts.
Though there are divergent views on whether the monetary regulator should increase or retain rates, there appears to be a consensus that the CBN should retain or hold rates to encourage the real sector grow the economy out of recession.
Prior to Kemi Adeosun, Finance Minister’s declaration that the economy is technically in recession, most analysts were rooting for a hike in monetary policy rate to attract foreign portfolio inflows.
The MPR at 12 percent is seen as negative since official inflation rate as at end May trended 15.6 percent. This, according to economic watchers, makes real yields equally negative, serving as disincentive for foreign portfolio investments.
They aver that for the new foreign exchange policy to succeed, the CBN may need greater foreign portfolio inflows.
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“The success of Nigeria’s currency liberalisation effort is likely to depend on its ability to attract greater foreign portfolio inflows. Further monetary policy tightening that restores positive real returns is necessary for Nigeria to attract more FX-sensitive, yield-seeking flows. It is also necessary to instill greater domestic confidence in the national currency, the naira,” analysts at Standard Chartered said.
At the end of its May 2016 meeting, the MPC retained the Monetary Policy Rate (MPR) at 12 percent with the asymmetric corridor at +200 basis points and -700 basis points. It also retained the Cash Reserve Requirement (CRR) and Liquidity Ratio (LR) at 22.50 percent and 30 percent, respectively.
However, there seems to be no argument in support of rates cut given the current economic situation but the impending recession in the Nigerian economy, according of experts from FSDH Merchant Bank, support a hold in rates at the current level while the fiscal measures to reflate the economy are implemented.
“The current high double digit inflation rate supports a rate hike. We, however, believe that the MPC and other government agencies will pursue growth and trade-off high inflation”, FSDH experts said.
The global economy faces significant risk from the United Kingdom’s (UK) decision to leave the European Union as the decision has created additional instability in the global economy.
The International Monetary Fund (IMF) revised its global Gross Domestic Product (GDP) growth forecasts downwards by 0.1 percent relative to its April 2016 forecast.
The global economy is now to grow at 3.1 percent and 3.4 percent for 2016 and 2017, respectively. The latest forecast as contained in the IMF WEO Update July 2016 edition, which stated that the outlook appears worse for the advanced economies, majorly due to the Brexit.
