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Monetary Policy Committee Leaves Benchmark Lending Rate Unchanged At 13.5%. Major Points For Discussion

Monetary Policy Committee

Amidst tensions in the global financial, economic and political environments, eleven members of the Monetary Policy Committee (MPC) met on the 20th and 21st of May 2019. Major highlights from the meetings include:

Developments In The Global Economy

The Monetary Policy committee reviewed developments in the global economy, noting with concern the falling trend in global output beginning in the second half of 2018. Consequently, the International Monetary Fund (IMF) lowered global output growth from 3.7% in 2018 to 3.6% in 2019 and further revised it downwards to 3.3% in 2019.

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The committee also noted that the weakening global output growth continued amidst prevailing fears from the intensification of trade tensions between the US and China, imposition of new rounds of sanctions on Iran, breakdown of BREXIT negotiations, a new wave of tension on the Korean Peninsula, vulnerabilities in major financial markets, and rising public and private debt in some Emerging Market and Developing Economies (EMDEs).

Developments In The Domestic Economy

Gross Domestic Product

Available output data from the National Bureau of Statistics (NBS) showed that real Gross Domestic Product (GDP) grew by 2.01% in Q1 2019 compared with 2.38% and 1.89% in the previous and corresponding quarters of 2018, respectively. This was largely driven by the non-oil sector which grew by 2.47% in Q1 2019 while the oil sector contracted by 2.40%. The Monetary Policy Committee detected that actual output remains below potential, implying that the economy still had sufficient headroom for non-inflationary growth. This is anticipated to be driven largely by sustained stability in the financial system; continued special interventions in agriculture, manufacturing and SME sectors by the bank; continued effort in improving transport infrastructure to address circulation challenges; continued expansion of business activities as indicated by the PMI and increased supply of foreign exchange to growth-stimulating sectors of the economy, among others.

Inflation Rate

Furthermore, the committee noted the uptick in inflation as headline inflation (year-on-year) rose slightly to 11.37% in April, 2019 from 11.25% in March, 2019. The increase in headline inflation was driven mainly by food inflation which rose by 13.70% in April 2019 from 13.45% in March 2019. Core inflation, however, declined marginally to 9.28% in April from 9.46% in March 2019. In April 2019, month-on-month headline moved to 0.94% from 0.79%, food to 1.14% from 0.88% and core inflation increased to 0.70% from 0.53% in March 2019, respectively.

The MPC noted that the recent uptick in inflationary pressure was seasonally driven and anticipated.

Accretion Of The External Reserves

The committee welcomed the sustained stability at both the bureau-de-change (BDC) and the Investors’ and Exporters’ (I&E) windows of the foreign exchange market, expressing optimism in the recovery of crude oil prices due to the OPEC production ceiling and other geo-political issues affecting oil exports.

The MPC also noted the stable accretion to external reserves which stood at $45.42 billion as at May 16, 2019, an increase of 2.20% from $44.44 billion at end-April 2019.

The Monetary Policy Committee Decision

The global and domestic developments have conditioned an environment of low optimism in the macroeconomic and financial spaces, compelling central banks to return to accommodative monetary policies.

As in the past, the committee measured the options of whether to be more accommodative, tighten or hold its position. They felt that although the slight inflation uptick should result in tightening, it nevertheless felt that doing this will limit the ability of Deposit Money Banks to increase credit at this time, given the need to support or redirect the focus of DMBs to new credit in support of consumer, mortgage and other priority sectors of the economy, including, SMEs, agriculture and manufacturing.

It also felt that given the fragile state of the economy, increasing the cost of credit would further contract investment flow and impact negatively on output growth. As regards loosening, some members felt that it was desirable to aggressively stimulate growth, restart the capital market activities and increase lending at lower rates, ultimately stimulating domestic aggregate demand.

Those against loosening felt that given that there was a marginal increase in headline inflation for April 2019, there is need to refrain from loosening in order not to make worse inflationary pressures. They also felt the economy would experience liquidity glut and without corresponding increase in real sector output, inflationary pressures could be elevated, resulting in likely exchange rate pressures.

In summary, the Monetary Policy Committee voted to:

  1. Retain the MPR at 13.50%;
  2. Retain the asymmetric corridor of +200/-500 basis points around the MPR;
  3. Retain the CRR at 22.5%; and
  4.  Retain the Liquidity Ratio at 30%.
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