Governor, Central Bank of Nigeria CBN, Godwin Emefiele

The Monetary Policy Committee MPC of the Central Bank of Nigeria CBN concluded its first meeting for the year 2021, Tuesday in Abuja with the decision to retain the benchmark interest rate MPR at 11.5per cent.

All the 10 members of the committee present also unanimously agreed to retain all other policy parameters comprising the asymmetric corridor, which remained at to +100/-700 bps around the MPR, the cash reserve ratio CRR was retained at 27.50per cent; while the Liquidity Ratio was also kept at 30.00per cent.

The committee however expressed grave concerns over the worsening inflationary trends in the country, a development that has put it in a policy dilemma.

Governor of the CBN, Godwin Emefiele, who read the communiqué issued at the end of the two-day meeting noted that the committee expressed concerns on the persisting uptick in inflationary pressure for the 16th consecutive month, with headline year-on-year inflation moving further to 15.75 per cent in December 2020 from 14.89 per cent in November 2020.

“This uptick was attributed to the increase in both the food and core components of inflation, which rose to 19.56 and 11.37 per cent in December 2020, respectively, from 18.30 and 11.01 per cent in November 2020. This continued upsurge in food inflation was attributed to the logistical bottlenecks, spurred by the increasing security challenges in many parts of the country, which disrupted food production and supply to the market.

“Other factors driving the core inflation, include the recent deregulation of the downstream sector of the oil industry, which led to hikes in the price of Premium Motor Spirit (PMS) and the upward adjustment in electricity tariff.

“The Committee, however, noted that as output rebounds, supported by the suites of stimulus packages by both the Federal Government and the Central Bank, inflationary pressure would likely begin to moderate in the near term”, Emefiele also said

On other developments in the domestic economy, the CBN cited statistics from the National Bureau of Statistics NBS, which indicate that the real Gross Domestic Product GDP contracted by 3.62 per cent in Q3 2020, compared to the 6.10 per cent in Q2 2020 and a growth of 2.28 per cent in the corresponding period of 2019.Developments

According to him, the real GDP contraction in Q3 2020 was largely driven by the decline of 13.89 per cent in the oil sector from 6.63 per cent in Q2 2020. The non-oil sector also contracted by 2.51 per cent in Q3 2020, compared with 6.05 per cent in Q2 2020. The weak performance observed in both the oil and non-oil sectors was largely attributed to the lag effects of the lockdown, persisting weak global demand for crude oil and security challenges across the country.

It was also gathered that the MPC noted with concern the continuing sluggish recovery in the Manufacturing and Non-Manufacturing Purchasing Managers’ Indices PMIs, which remained below the 50-index point benchmark in December 2020, at 49.6 and 45.7 index points, respectively, compared with 50.2 and 47.6 index points during the previous month. This weak performance was attributed to the resurgence of the pandemic, foreign exchange pressures, and increased costs of production, general increase in prices and decline in economic activities. 

He said: “Similar trend was also observed in the employment level index component of the manufacturing and non-manufacturing PMIs, which contracted for the ninth consecutive month in December 2020 to 46.3 and 45.1 index points, respectively, compared with 50.2 and 46.7 index points in the previous month. The Committee, however, noted that current growth headwinds would likely moderate in the short to medium term, as the containment measures and the sustained implementation of economic stimulus permeate the domestic economy.

“At this meeting, MPC was, as in the last meeting, confronted with a policy dilemma as to whether to aggressively combat the inflationary pressure or support measures currently aimed at stimulating growth and reversing the recession.

“Although the economy is currently in a stagflation environment with simultaneous occurrence of inflationary pressures and contracting output, the MPC resolved to reverse both developments and continue pursuing price stability in growing the economy.

“MPC was of the view, that whereas there may be wisdom in loosening, given that the impact of the global Covid-19 pandemic has resulted in constrained activities, disruption to supply chain and suppress aggregate demand, an accommodative stance may be required to stimulate credit expansion and boost recovery in the short term.

“The Committee was also of the view that an expansionary policy would enable the monetary authorities convince the financial institutions to reduce loan pricing and defer interest and principal repayments to critically affected obligors in a sustainable manner. On the flip side, MPC also opined that an aggressive expansionary stance may worsen both inflation and the negative real interest rate, thereby resulting in negative consequences on exchange rate.

“With regard to tightening, MPC concluded that this may run contrary to its objectives of providing affordable credit to households, MSMEs, Agriculture, and other output growth and employment stimulating sectors of the economy. MPC was therefore of the view that it should pursue its current stance of systematic synchronization of monetary and fiscal policy accommodation through its developmental finance initiatives, aimed at mitigating the impact of the COVID-19 pandemic on Nigerians.

“While expressing understanding of the public health dilemma of the recent spike in infections, MPC encouraged Government not to consider a wholesome lockdown of the economy so as not to reverse the current gains of the stimulus earlier provided in 2020. It also encouraged the CBN management to intensify its efforts in the targeted credit facility to household, SMEs, the health sector, as well as agriculture and manufacturing sectors which would not only boost consumer spending but result in manufacturing output thereby positively impacting the GDP. On this basis, the MPC agreed to hold all policy parameters constant.”