CBN, interest rates and uncertainty

A recent meeting of the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) indicates that the apex bank is indeed not in a hurry to cut interest rates and is thus bent on maintaining the status quo in monetary policy management in the economy. According to Mr. Godwin Emefiele, the CBN governor, the Monetary Policy Committee was of the view that loosening interest rates would increase money supply and increase aggregate demand and liquidity, which would be counterproductive for the economy if aggregate supply or national output is not correspondingly increased. Hence, by this logic, the bank feels that loosening of interest rates now would not be an appropriate policy option and that its prescription of minimum lending thresholds to the deposit money banks will stimulate credit growth, enhance real sector growth, improve credit delivery and ultimately lead to a trending down of interest rates generally.

This logic and posture by the CBN has been appraised by different schools of thought on the direction of monetary policy in the country particularly with the country’s economic recovery from recession in 2018, still fragile. The need to loosen interest rates and thus stimulate economic growth has been canvassed by those opposed to the posture of the CBN in its tight monetary policy stance in that the normal reaction in advanced economies is to lower rates when the economy needs a stimulus with instances of South Africa and other economies cited. This position was also canvassed by a one-time Minister of Finance in the Buhari administration, Mrs. Kemi Adeosun who invariably was disappointed in 2017 when the Monetary Policy Committee of the CBN maintained its tight monetary policy stance despite the public declaration of her preference on the issue.

The counter argument to this has been that in an economy where productivity is low and the real sector is bedevilled with numerous challenges such as poor infrastructure and insecurity among others, a loosening of credit will encourage deposit money banks to channel funds to financial assets as well as put pressure on the exchange rate.

The reference of situations in advanced economies appears irrelevant given that the structures of their economies are largely different from Nigeria’s. It is noticed that this has been the position taken by the CBN, which has chosen to remain faithful to its core focus of maintaining price stability first and foremost and then managing the trajectory of other macroeconomic variables in this regard – particularly given that there is always a trade-off in economic policy making. This largely explains the current position of the CBN, of not being in a hurry to loosen interest rates, as declared by the governor.

This recent posture of the CBN, particularly at a time when Emefiele is beginning his second term in office, calls for closer scrutiny. A number of questions arise. First, are these postures in policy purely based on macroeconomic considerations and analysis or are they tainted with political considerations? Is the CBN trying to satisfy the powers-that-be in its maintenance of a status quo? Granted that the maintenance of price stability is the core function of central banks all over the world, has nothing changed significantly in the economy in the past two years that would warrant a further reduction in interest rates? It was only in the March MPC meeting that the monetary policy rate was lowered from 14% by 50 basis points to the current 13.5%.

Given that inflation is currently in the region of 11%, would there be no value if the MPR is further slightly reduced, particularly when any untoward increase in inflation can be addressed by policy adjustments in subsequent MPC meetings with a corresponding adjustment of other monetary policy ratios involving the banks? For example, CBN had recently attempted to restrict the banks from unduly investing in treasury bills as well as making lending to the real sector attractive. It may appear to some that government would want sustenance of the status quo in monetary policy as a better option to increasing rates, which ordinarily should be the appropriate policy option when the economy is confronted with issues of uncertainty, poor infrastructure and insecurity.

Another pointer to the suspicion that the CBN is dancing to the tune of government is the recent restriction of foreign exchange allocation for milk importation. This appears to be another suspected politically inclined policy action, which seemingly weighs in on the current farmer-herders clashes across the country. Banning milk importation tends to support the need to enhance milk production locally and by consequence, the Federal Government’s livestock development programme. This newspaper has stimulated discussion points on why the Federal Government should protect the apex bank from  curious attack of Miyetti Allah members who are supposed to be beneficiaries of the policy shift, notably restriction on milk importation.  

Overall, though the CBN should not lose sight of its core function of maintaining price stability, it should work towards protecting its autonomy jealously (as it tends to do on this interest rates issue) and come up with policies that will promote the growth of the Nigerian economy. It should liaise with the fiscal authorities in ensuring that the negative effects of fiscal indiscipline and unnecessary borrowing with its negative debt service payment implications are adequately managed. It should focus on issues that will address the fundamentals of the economy, which impact on production and increase in aggregate supply. Effort should be made to create a favourable investment climate that would promote economic growth, job creation and macroeconomic stability. In the meantime, as the new federal cabinet members are set to settle down from tomorrow, the CBN should fill the gap and ensure that the economy works for the good of all.