CBN retains monetary rate with inflation cruising at 18.3%

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    TUE, NOVEMBER 22 2016-It is as expected. The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has declared that it will hold all rates as they were in its final meeting of 2016 but analysts are not sure whether markets will respond to the news at all because such policy declaration in the past never had the potency whatsoever in determining economic activities.

    According to one unimpressed economy watcher, ordinarily, a correct prediction of the outcome of such a meeting can yield significant gains to an investor who cashes in on the prediction to make investment decisions.

    “But that is the world of theory or perhaps in better organized economies where there is a strong correlation between the Central Bank’s monetary policy decisions and the economy in general. The reality of Nigeria is far from this theoretical world or this organized economy,”

    As usual the MPC considered domestic and international economic and financial market conditions before Godwin Emefiele, the CBN governor pronounced the MPC decided it is best to retain Monetary Policy Rate (MPR) at 14%, leaving the asymmetric corridor of +200 basis points and -500 basis unchanged, retain the cash reserve requirement (CRR) at 22.5% and retain Liquidity Ratio at 30%.

    The very much criticised foreign exchange policy also stayed unchanged. Latest indications on the FX policy front, according to analysts with confidential sources at the CBN, are that both the Trade and Investment ministry and the CBN are in discussions over ways to ensure supply of FX to the manufacturing sector.

    The MPC comes just a day after the National Bureau of Statistic (NBS) released figures showing further contraction in gross domestic product (GDP). GDP reflected an overall drop of -2.24 % (YonY) in real term in the third quarter of 2016 following a 2.06% contraction in the second quarter of 2016.

    Some analysts who are least impressed with the MPC decision say the CBN have surrendered to the inflationary onslaught with the MPR still set at 14% well below the current inflation rate of 18.3%.

    The MPR is the interest rate at which CBN lends to commercial banks and other clients. Being the lender of last resort, it is supposed to signal the maximum rate that a deposit bank would give for deposits and is therefore central in determining banks’ lending rates. However, with inflation currently cruising at 18.3%, bank deposit rates below inflation rate result in negative yield to the investor.

    “It made no economic sense therefore, for the MPC to maintain MPR at 14.0%. Clearly, the reason why they can get away with it is that the market does not care or respond to the MPR. It has no potency whatsoever in determining economic activities,” one analyst told theGandBJournal.

    He said, “to show how further disconnected the Nigerian money market is from an organized economy, the Treasury Bill rate is supposed to signal the baseline return on riskless asset, yet bank deposit rates, with all their associated risks are consistently lower than Treasury Bill rates in Nigeria. The question would be, why would investors keep deposits with banks at lower rates than they would earn from a riskless treasury bill investment?”

    TheGandBJournal observes that this disconnect is not limited to the money market in Nigeria as the capital market fares no better. There is hardly any correlation between our stock market and our economy measured by GDP. The firms trading at the stock exchange hardly represent any indication of the character of the economy.

    For instance, whereas, agriculture accounts for 22% of the rebased GDP, the agriculture sector is hardly noticeable in the stock exchange and while oil and gas represents 15.9% of the rebased GDP, there is no presence of any oil and gas producing company in our stock market. The same can be said of the telecommunications subsector. –theGandBJournal

     

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