Nigeria – Monetary policy instruments left unchanged

nigeriaThe first Monetary Policy Committee (MPC) meeting led by the new governor, Godwin Emefiele, was held on July 22. As at the May MPC meeting of the Central Bank of Nigeria (CBN), all monetary policy instruments were left unchanged. In January, the cash reserve requirement (CRR) on public sector deposits was raised from 50% to 75%, while the CRR on private sector deposits was raised from 12% to 15% in March. The Monetary Policy Rate (MPR) remains at 12%, and was last changed in October 2011.

Although there was no change in policy direction at the July meeting, a difference in tone was observable. In particular, the emphasis on employment was clear, in line with previous statements made by the new governor. At his speech to the Senate in March, Mr Emefiele stated that “whatever monetary policy decisions that would be taken would be those that would improve the level of employment in Nigeria; we know that employment is very important”. Furthermore, in June, the new governor alarmed investors by noting that the CBN will “pursue a gradual reduction in interest rates”. The mere mention of lower interest rates spooked investors, given that the opposite is believed to be required in current conditions. The governor also announced in June that the unemployment rate will begin to be used as a key variable when deciding on the stance of monetary policy. The MPC statement conveyed the committee’s satisfaction with macroeconomic stability, but noted its concerns regarding “the weak translation of stability to microeconomic gains in employment and access to finance especially by small and medium scale businesses”, adding that monetary policy decisions must take into account the long-run effects on employment, the creation of wealth, and the growth of businesses.

In June, Nigeria’s consumer price index (CPI) increased by 8.2% y-o-y (0.8% m-o-m), up from 8% y-o-y (0.8% m-o-m) in the previous month. Food price inflation edged up from 9.7% y-o-y to 9.8% y-o-y, while the core rate increased from 7.7% y-o-y to 8.1% y-o-y. The MPC noted that this upward trend in price pressures “should be monitored closely to achieve a reversal”.

WHY DO WE CARE? Mr Emefiele and the rest of the MPC plan to lower interest rates gradually over the next five years – if conditions allow. The MPC statement also emphasised “the necessity of sustaining a stable naira exchange [rate]”. The MPC’s dilemma is that it first needs to succeed in lowering inflation and keeping it there, before interest rates can be lowered. To achieve this, monetary policy needs to remain tight for the time being. Furthermore, while the MPC’s desire to keep the naira exchange rate stable is clear, it will not be so easy to achieve in practice. In essence, the ability to do so is linked to the level of foreign reserves, which – apart from changing the interest rate – is largely out of the central bank’s control. Instead, the level of reserves is influenced by portfolio flows, levels of oil output and prices, and the extent of oil revenue leakages. 

Analyst: Melissa Verreynne

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