MPC: Falling Oil Prices, Inflation, Election Spending to Top Agenda
22 Mar 2015
By Festus Akanbi
Nigeria ThisDay
As the Central Bank of Nigeria (CBN) begins its 243rd Monetary Policy Committee (MPC) meeting tomorrow, some of the issues that will top the agenda include the sinking oil prices, marginal increase in the nation’s inflation figure for the month of February, election-induced liquidity in the system and the relative stability which the new regime in foreign exchange market has brought to the naira.
However, economic analysts, including Managing Director, Financial Derivatives Company, Mr. Bismarck Rewane has ruled out any major upset in the existing rates. Rewane’s views were in tandem with those of the Executive Secretary and Chief Executive, Financial Market Dealers Association of Nigeria (FMDAN), Mr. Wale Abe, who maintained that no major policy shift may come out of tomorrow’s meeting.
Last week, crude oil prices took a roller coaster ride dipping down to a six-year low of $42.17 per barrel before bouncing back and closing the day at $44.66 per barrel. The current slide in crude oil price is being traced to the report that the US domestic crude stockpiles have risen to a record high. Stored supplies of crude oil in the U.S. are at the highest level in about 80 years, according to the U.S. Energy Information Administration, and production continues to grow. Demand is typically restrained at this time of the year as refiners process less crude while performing seasonal maintenance.
Analysts believe the fall in oil price would give the CBN some concerns given the implications on the nation’s foreign reserves, which was put at $30.8 billion as at March 10.
Rewane, who said the monetary committee might not tinker with the existing rates, said, “All the things that are supposed to be done by MPC have already been done. I don’t expect any dramatic changes. The only thing that I believe may happen which is just out of intuition is that I think they may bring down interest rates. The central bank may consider bringing down interest rates by one per cent.”
When confronted with the likelihood of linking the decision with the coming election, Rewane said that is “for you and I to think but the point is whether they do it now or they do it in the future, people must talk. If they do it after the election, they will say they didn’t do it because of the election, if you do it before the election, they will say you do so because of the election but the truth is that after you have devalued the currency, typically, you will allow the interest rate to come down a little bit.
“If I’m to pay the school fees of my child in United Kingdom which is 30,000 pounds, five years ago, it would have cost me something around N6 million, but today, it will cost me N10 million. You have already taken the liquidity away from me; you don’t need high interest rate to protect liquidity anymore. You do not depreciate the currency and increase interest rates at the same time. You have to do just one.
“My projection is that they will do nothing, because it is too close to an election and if they do anything at all, it will be one of these things: bring down interest rates and then reduce the cash reserve ratio so that the banks can have liquidity.”
The chief executive, FMDAN, who spoke with THISDAY, said whatever decision taken at the meeting are likely to be short term, adding that some of the current economic challenges will fizzle away after the general election.
He said, “All those indicators that you are seeing are issues which are environmental for now and they are subject to change. At a pre-election period like this, we don’t expect things to remain as they are after the election. However, I don’t see the monetary policy committee fundamentally taking a position that is different from what we know now.”
Abe explained further that “It is the election that will decide what happens next because the environment changes immediately the election is over especially that of the local environment.
“Inflation will still remain an area that the central bank will pay particular attention to. It involves a trade-off. The reality of it is it is the impact of the devaluation that we are now having after about two months lag. It is now we are beginning to feel the impact in terms of policy transmission. That is why inflation is climbing. The only thing that can change the scenario is if oil price goes up significantly which is not likely to happen.
“So Nigerians should not expect a fundamental change. What CBN might consider is to raise interest rate in order to tackle inflation but I don’t see that happening now because the environment is really not conducive. So, I see the CBN maintaining the status quo. Whatever decision they are likely to take will be short-term until after the election. The bank may even call an extra-ordinary meeting after the election.”
Another issue slated for discussion is the sustained increase in the inflation figure in recent times. According to the National Bureau of Statistics, Nigeria’s inflation rate rose for the third consecutive month to 8.4 per cent in February, from 8.2 per cent the previous month, partly driven by increases in prices of imported food items.
The central bank devalued the naira in November and scrapped its bi-weekly forex auctions, with many analysts fearing the downward pressure on currency could stoke inflationary pressures. It is believed that the MPC will factor in the progressive rise in inflation in its decision at the meeting.
Given the fact that the general election is kicking off next weekend, market watchers believe the management of the liquidity situation in the economy will be one of the considerations at the MPC meeting. As campaigns hot up, politicians have engaged in a spending spree, a development which financial experts said would make the economy to be awash with liquidity. This development, it is feared, could be a strong reason for the retention of the existing monetary policy rate.
By Festus Akanbi
Nigeria ThisDay
As the Central Bank of Nigeria (CBN) begins its 243rd Monetary Policy Committee (MPC) meeting tomorrow, some of the issues that will top the agenda include the sinking oil prices, marginal increase in the nation’s inflation figure for the month of February, election-induced liquidity in the system and the relative stability which the new regime in foreign exchange market has brought to the naira.
However, economic analysts, including Managing Director, Financial Derivatives Company, Mr. Bismarck Rewane has ruled out any major upset in the existing rates. Rewane’s views were in tandem with those of the Executive Secretary and Chief Executive, Financial Market Dealers Association of Nigeria (FMDAN), Mr. Wale Abe, who maintained that no major policy shift may come out of tomorrow’s meeting.
Last week, crude oil prices took a roller coaster ride dipping down to a six-year low of $42.17 per barrel before bouncing back and closing the day at $44.66 per barrel. The current slide in crude oil price is being traced to the report that the US domestic crude stockpiles have risen to a record high. Stored supplies of crude oil in the U.S. are at the highest level in about 80 years, according to the U.S. Energy Information Administration, and production continues to grow. Demand is typically restrained at this time of the year as refiners process less crude while performing seasonal maintenance.
Analysts believe the fall in oil price would give the CBN some concerns given the implications on the nation’s foreign reserves, which was put at $30.8 billion as at March 10.
Rewane, who said the monetary committee might not tinker with the existing rates, said, “All the things that are supposed to be done by MPC have already been done. I don’t expect any dramatic changes. The only thing that I believe may happen which is just out of intuition is that I think they may bring down interest rates. The central bank may consider bringing down interest rates by one per cent.”
When confronted with the likelihood of linking the decision with the coming election, Rewane said that is “for you and I to think but the point is whether they do it now or they do it in the future, people must talk. If they do it after the election, they will say they didn’t do it because of the election, if you do it before the election, they will say you do so because of the election but the truth is that after you have devalued the currency, typically, you will allow the interest rate to come down a little bit.
“If I’m to pay the school fees of my child in United Kingdom which is 30,000 pounds, five years ago, it would have cost me something around N6 million, but today, it will cost me N10 million. You have already taken the liquidity away from me; you don’t need high interest rate to protect liquidity anymore. You do not depreciate the currency and increase interest rates at the same time. You have to do just one.
“My projection is that they will do nothing, because it is too close to an election and if they do anything at all, it will be one of these things: bring down interest rates and then reduce the cash reserve ratio so that the banks can have liquidity.”
The chief executive, FMDAN, who spoke with THISDAY, said whatever decision taken at the meeting are likely to be short term, adding that some of the current economic challenges will fizzle away after the general election.
He said, “All those indicators that you are seeing are issues which are environmental for now and they are subject to change. At a pre-election period like this, we don’t expect things to remain as they are after the election. However, I don’t see the monetary policy committee fundamentally taking a position that is different from what we know now.”
Abe explained further that “It is the election that will decide what happens next because the environment changes immediately the election is over especially that of the local environment.
“Inflation will still remain an area that the central bank will pay particular attention to. It involves a trade-off. The reality of it is it is the impact of the devaluation that we are now having after about two months lag. It is now we are beginning to feel the impact in terms of policy transmission. That is why inflation is climbing. The only thing that can change the scenario is if oil price goes up significantly which is not likely to happen.
“So Nigerians should not expect a fundamental change. What CBN might consider is to raise interest rate in order to tackle inflation but I don’t see that happening now because the environment is really not conducive. So, I see the CBN maintaining the status quo. Whatever decision they are likely to take will be short-term until after the election. The bank may even call an extra-ordinary meeting after the election.”
Another issue slated for discussion is the sustained increase in the inflation figure in recent times. According to the National Bureau of Statistics, Nigeria’s inflation rate rose for the third consecutive month to 8.4 per cent in February, from 8.2 per cent the previous month, partly driven by increases in prices of imported food items.
The central bank devalued the naira in November and scrapped its bi-weekly forex auctions, with many analysts fearing the downward pressure on currency could stoke inflationary pressures. It is believed that the MPC will factor in the progressive rise in inflation in its decision at the meeting.
Given the fact that the general election is kicking off next weekend, market watchers believe the management of the liquidity situation in the economy will be one of the considerations at the MPC meeting. As campaigns hot up, politicians have engaged in a spending spree, a development which financial experts said would make the economy to be awash with liquidity. This development, it is feared, could be a strong reason for the retention of the existing monetary policy rate.
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