Ahead of its meeting this week, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), Professor of Capital Market at the Nasarawa State University, Keffi, Uche Uwaleke, has noted that the MPC decision would largely be driven by inflationary trends.
Speaking with NIGERIAN ANCHOR Sunday in Abuja, Uwaleke said that exchange rate volatility naira float would be a key consideration of the Committee.
At the last MPC meeting, the Monetary Policy Rate (MPR) was raised for the seventh consecutive time to 18.5 percent, the highest since the inception of the MPC.
“The acting CBN governor, who will be chairing the meeting, has been part and parcel of the hawkish MPC stance for months now, and so another rates hike will not come as a surprise.
“Be that as it may, the MPC should equally recognize that the removal of fuel subsidy has slowed down economic activities considerably with an attendant drop in productivity.
“So, economic growth and jobs are already negatively impacted such that a further monetary policy tightening would only worsen the situation.
“Cost of capital will further increase and access to credit by small businesses will become more difficult,” he said.
He said that a further increase in the MPR was also likely to endanger the asset quality of banks through an increase in non-performing loans as Deposit Money Banks (DMBs) reprised their loans.
“In this regard, the balance of risks dictates that the MPC should pause the policy rate hikes which have been on since May last year by maintaining a hold position on all policy parameters.
“The MPC should recognize that much as its primary mandate is to maintain price stability, it equally has a responsibility to support output growth.
“This is against the backdrop of the fact that many of the factors driving inflation in Nigeria, such as insecurity affecting food output and high energy costs, are outside the control of the CBN,” he said.
Uwaleke urged the MPC to seize the opportunity of its forthcoming meeting to signal readiness to support output growth.
“This can be done through policies geared towards fostering a low-interest rates environment while keeping an eye on inflation, using a mix of heterodox measures,” he said.
A partner and Chief Economist at KPMG Nigeria Mr Yemi Kale, said the MPC would be tricky considering that economic growth has been fragile.
“At the same, inflation rates are high and rising, and with the recent subsidy and FX reforms, inflation is almost definitely going to rise higher and all happening at a time confidence in its ability to control inflation is weak,” he said.
He said the inability of the CBN to control inflation had been largely due to the main drivers of inflation being structural and supply-based, which could not be controlled effectively with the money supply tools available to it.
He added that the recent growth in money supply following the various reforms would likely worsen inflation.
“Excess liquidity may also find its way into the FX market and put pressure on Naira, both at official and parallel markets.
“The MPC will therefore have a difficult decision on how to pull inflation down without hurting economic growth further, which further tightening might cause.
”However, I expect that the CBN will be more concerned about inflation being its core responsibility and will tighten the MPR further but release the Cash Reserve Ratio (CRR) to support the economy,” he said.
