May 8, 2019

A turn in MPC members’ sentiment

We read the latest personal statements of members of the monetary policy committee (MPC) with added interest because in March they made the first change to the policy rate since July 2016 (a cut of 50bps to 13.50%). Our close scrutiny of the statements, which might be viewed as pedantry in some quarters, has led to a discovery: the communique, issued directly after the meeting, stated that one member had voted for a 100bps reduction, whereas the statements show that two had made such a decision.

                                                                                                                  

  • This reinforces the prevailing narrative that the committee was able to adopt a “pro-growth” stance because the CBN had presided over a period of price and exchange-rate stability as well of foreign reserves accumulation. On this logic, the MPC may well be tempted to repeat the experiment.
  • The majority felt that the inflation outlook was benign. While above the informal range of between 6 and 9 per cent, the rate had settled into a “growth neutral corridor”. The threat from the elections had not materialized.
  • Growth continued to disappoint and the majority saw a policy rate cut as supportive of a pick-up. Several members pointed to the favourable output gap that in-house research had identified.
  • Monetary aggregates as at end-February also disappointed, and a number of members identified the scope for easing as a result.
  • The consensus among members was that the deposit money banks (DMBs) were in “improving health”. Their NPLs had declined, and their returns on assets and equity had improved since the MPC meeting in January. One member insisted therefore that there was “elbow room” for the banks to share the rate cut with their customers.
  • Others were less generous, with two singling out the 26.2 percentage point spread between DMBs’ maximum lending and consolidated deposit rates. One highlighted the single-digit lending rates on offer from development banks, and all lauded the CBN’s growing role in the field. In this context we recall a story in the local media that the CBN will shortly issue five new bank licenses.
  • Some clarification on the CBN’s growth forecast is needed since two figures were mentioned, although, as expected, both are below 3%.
  • One grounded member ventured that the “policy rate is already losing its role as an anchor for interest rates in the economy”. As well as being one of the majority of six in favour of a 50bps rate cut, the member was alone in calling for a reduction in banks’ cash reserve requirement ratio (of 100bps).