The monetary policy committee in its
meeting on March 20 &21 resumed its
tightening cycle after a period of
accommodative monetary policy. The
CBN Governor cited an increase in
inflationary pressures as a major factor
behind the decision. He emphasized
that the factors affecting inflation were
more structural than transient.
The consensus view amongst analysts
was for retention of the status quo. The
CBN has placed emphasis on
stimulating growth through increased
lending to the private sector. However,
the MPC decided to go along with
conventional economic logic, which
suggests an increase in interest rates
during periods of surging prices.
This is an emphatic step taken by the
MPC and is a signal of the CBN’s
determination to complement fiscal
policy in spurring growth. The failure to
adopt a market oriented forex policy
will still leave the currency vulnerable
to speculative attacks in the near term.
So politically volatile is the forex debate
that even the president yesterday said
that he believes that Nigeria’s external
imbalances were temporary.
The CBN is expecting an increase in
portfolio investment inflows in
response to the increase in policy rate.
However, a 1% p.a increase in MPR
does not mitigate the possible
devaluation risk to portfolio investors.
Capital outflows were recorded even
when the MPR was 13% p.a and the US
Fed rate was 0%. Investors are still
uncertain of the country’s exchange
rate policy, the big elephant in the
· Raise MPR by 100 bps to 12%
· Narrow the asymmetric
corridor of MPR to +200/-500bps
from +200/- 700bps
· Increase CRR by 250 bps to
· Maintain liquidity ratio at 30%
· Silent on exchange rate policy
· Intense inflationary pressures: The
committee stated that the factors
stoking inflation were structural.
The MPC highlighted increased
costs of imports, exchange rate
pressures, security challenges and
seasonality as some of the
structural factors influencing the
increase in consumer prices
· Slowing economic growth
· Oil price dynamics
Impact of 100bps increase in MPR and
250bps increase in CRR
The upward adjustment in the MPR will
reduce liquidity in the system. Lower
liquidity will reduce the demand for
dollars in the short term. However,
there will be a renewed demand for
dollars as soon as the budget is passed.
The price of fixed income instruments
will decline. For instance, the coupon
rates of bond issues priced to the MPR
will change just as federal government
debt cost also changes. With inflation
presently at 11.4%, the policy rate
return in real terms changes to positive
(0.6%) from a negative value (-0.4%).
The decisions made by the MPC will
increase interbank interest rates. In
addition, borrowing costs will increase
while banking sector profitability takes
a hit, as net interest margins diminish.
Impact of decision on markets
The pressure on the naira is expected to
persist but at a reduced level. With oil
prices rebounding, the effect of
defending the naira on the reserves will
not be as severe. The stronger cash flow
will help reduce the pipeline between
application for forex and allocation.
Given that a significant amount of
commodities are imported, the
exchange rate issues facing the country
are also being reflected in the
commodity market. Key imported
commodities include wheat, raw sugar,
rice and palm oil. Even commodities
that are locally produced have had their
prices increased as producers try to
make up for lost income in other
The stock market has been fluctuating
and mainly driven by earnings
announcements. The lack of clarity
pertaining to Nigeria’s exchange rate
regime is making companies uncertain
about making key investment decisions.
At a recent conference in Abidjan,
Unilever emphasised the pains that the
current exchange rate quagmire is
causing manufacturing companies.
Other African countries have also made
changes in its monetary policy stance.
South Africa, Egypt and Namibia
increased their benchmark rates. Kenya
and Ghana, on the other hand
maintained the status quo on their
There is an increasing probability that
the price level will remain stubbornly
high in the short run. This is because of
the possibility of wage pressure from
labour. The countervailing factor is
consumer resistance. An increase in
aggregate output because of budgetary
spending will help douse inflationary
pressures. Hence, the inflation outlook
for March is that prices will remain at
the 11-12% range.