Last week, the Monetary Policy Committee (MPC) voted 9-3 to resumed monetary tightening citing; fiscal imbalances, rising global commodity prices and currency stability as its primary basis for the hike. Much has since been made about the hawkish outcome of the meeting and as is to be expected, capital market participants have stood on either sides of the MPC’s decision. Opponents caution that the MPC’s “excessively” hawkish policy action may stifle economic growth and upset the fragile recovery in the banking sector, while proponents note that such steps are necessary to curtail foreign reserve depletion, curb fiscal excesses and to maintain long term price stability. With the effects of MPR hike beginning to pay out across the capital markets and banking sector, I ask: Did the CBN over react?
To answer this question, i perform a comparative analysis of the MPC’s policy action relative to other resource focused emerging and frontier economies with macroeconomic similarities to Nigeria (Table 1). Using, Pakistan, Kazakhstan, Bangladesh, South Africa and Brazil as yardsticks, I focus on viewing monetary policy in the context of the key macroeconomic factor which drove the MPC’s last decision, including; inflation, fiscal policy (as measured my changes in budget deficit) and foreign exchange rates, in comparison to central banks in similar economic environments.
An evaluation of these key variables points to the significant correlation between policy interest rates and inflation rate--as might be expected--with all benchmark economies maintaining policy rates in-line-with or above inflation. In this respect, Nigeria appears to be the exception, with policy rates significantly below current inflation. The comparative analysis lends further credence to the MPC‘s hawkish stance. In fact, compared to Pakistan and Kazakhstan (both resource dependent nations with similar GDP per capita and inflationary pressures as Nigeria) the MPC’s position is relatively dovish. Given that price stability is the primary mandate of any central bank, it would appear, on a comparative basis, that Nigerian monetary policy is largely accommodative when view in the context of 11.1% inflation. Also, with the exception of Nigeria and South Africa, other benchmarked economies have experienced significant appreciation in currency albeit due to capital importation in line with interest rate parity.
Clearly, the nuances of Nigeria economy cannot be ignored in assessing policy actions. For instance monetary policy transition mechanism remains a key concern in for Nigeria, and it might be argued that rates reviews should take its relative ineffectiveness into consideration. However, I emphasize the commonalities that underpin global inflation in the current environment, i.e. rise in commodity prices, partly driven by easing induced dollar weakness. With this in view, I highlight the fact that, from an interest rate parity perspective, economies that have moved further with policy tightening present more attractive opportunities for capital flows, which may perhaps explain the relative performance of their respective currencies.
Thus, given outcomes in the economies are further down the tightening path, I do not rule out the possibility that measures taken so far by the CBN will fall short of achieving the its key goals—reining in inflation and supporting the Naira. Thus I believe that there is scope for the CBN to continue tighten further and do not rule out the possibility of another 25-50 bps hike at its next meeting. I look to inflation figures and other monetary aggregates for March and April for a better sense of the degree to which the CBN’s previous measures have had the intended effects, for this will largely inform the MPC’s next move.
Table 1: Key macro economic factors across frontier and emerging economies
By Mandela Toyo |
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