CBN keeps policy parameters unchanged amid global monetary concerns


. Policy retention not surprising, say analysts

As expected by analysts, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), at the end of its two-day meeting yesterday, in Abuja, voted to retain all key monetary policy parameters.

Accordingly, the monetary policy rate (MPR) at 11.5% with the asymmetric corridor of +100/-700 basis points.

The Cash Reserve Ratio (CRR) was retained at 27.5%, while the liquidity ratio was also kept at 30%.

Announcing the Committee’s decision, The CBN Governor, Godwin Emefiele, said: “The MPC believes that the existing parameters have supported the growth recovery and should be allowed to continue for a little longer for consolidation to achieve the Committee’s mandate of price stability conducive for growth.”

Maintaining status quo

Defending the MPC’s decision to maintain the status quo, Emefiele said it was a choice between easing its accommodative stance, maintaining the status quo or tightening it to bring down inflation closer to the bank’s medium-term target of 6.0% – 9.0%.

The latter, it noted, would help suppress inflationary pressures, but also constrain the flow of credit and subdue output growth, while loosening would lead to further widening in negative real returns and magnify price distortions in the financial market.

While referencing the 4.03% growth in real gross domestic product (GDP) and the 6th consecutive monthly decline in headline inflation, the MPC also called for caution given the tightening in global financial conditions amidst continued slacks in the domestic labour market.

The Committee therefore called on the fiscal authority to sustain interventions that would stimulate economic growth, while commending the continued support for the recovery process despite persistent security challenges amidst inadequate infrastructure.

The Committee is convinced that the economic outlook shows a continuous rebound in growth, amid relative price stability in the international oil market.

The Committee reiterated the need for the CBN to sustain its direct intervention in the growth-stimulating sectors to strengthen the recovery process.

Not surprised

Reacting to the MPC’s decision, the former Director-General, Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, said the outcome of the meeting was expected.

This, according to him, is because, “The economy is yet to recover from the shocks of the pandemic even as there has been four consecutive quarters of GDP growth.”

Yusuf, an Economist and Public Analyst, therefore argued that it was necessary for the accommodative monetary policy stance to be sustained.

“It is noteworthy that the CBN has been bullish in its development finance initiatives, which has benefited many companies, especially in the real sector,” he added.

Nonetheless, he insists that the exchange rate depreciation and the liquidity in the foreign exchange (forex) market remains a source of concern to investors.

For Cordros Securities, the MPC was being cautious in view of “the likely impacts of the normalisation of monetary policies by central banks in advanced countries.”

Such concerns, it said: “is justified given the attendant effect of rising global bond yields on capital flows into emerging economies like Nigeria. Moreover, there has been a chorus among systemically critical central banks to wind down their asset purchase programme.

“Notably, the U.S. Federal Reserve has announced its decision to begin reducing the monthly pace of its net asset purchases by $15billion later this month and by $30billion beginning in December.

“Our baseline expectation is that the Fed would wind down its net asset purchases by June 2022 based on the current pace of reduction, paving the way for a possible rate hike in H2-22.

“Thus, to our minds, the underlying tone of the Committee suggests the apex bank is bracing up for a change to a hawkish policy from Q2-22, a period that we think the Committee will judge that substantial progress has been made in supporting economic recovery.”

The MPC believes that the existing parameters have supported the growth recovery and should be allowed to continue for a little longer for consolidation to achieve the Committee’s mandate of price stability conducive for growth.

Market Impact

Cordros Securities also assessed the implications of the MPC’s decisions on the fixed income and equities markets.

Fixed Income – do not expect material deviations as the MPR is increasingly becoming a signalling tool for market rates, but expects medium-term hike in interest rates to drive aversion for long-dated instruments.

“As a result, we believe bond investors are likely to maintain the strategy of playing at the short to the belly of the yield curve.

“With the attractive return on fixed deposits and upside risks to inflation on the horizon, we expect investors to resist the Debt Management’s Office (DMO’s) attempt to bring down rates at bond auctions to improve inflation-adjusted returns.

“Notwithstanding, we believe deliberate efforts by the DMO to reduce borrowing costs for the government will keep the yield curve below 14.0% levels.  

Equities – Since the last MPC meeting in September, bullish sentiments have dominated the local bourse. The year-to-date (YTD) return currently stands at 7.4% compared to a negative of 0.1% as of the end of September.

“We believe the positive performance was supported by the impressive 9M-21 earnings delivered by companies amid the euphoria that greeted MTN Nigeria and Airtel Africa’s announcement of Approval in Principle (AIP) obtained from CBN regarding applications for Payment Service Bank (PSB) licence.

“The outcome of the MPC meeting has already been priced; hence, we expect a neutral reaction from market participants.

“Overall, we see scope for the market to sustain the positive performance in Q4-21, given investors positioning in dividend-paying stocks ahead of 2021FY dividend declarations in Q1-22, and prospect of increased activities from FPIs (foreign portfolio investors) supported by improved liquidity conditions at the IEW (investors and exporters’ window).”

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