Photograph — Financial Watch

Nigeria’s new inflation reports and the Senate’s decision to finally pass the 2018 budget has set the stage for the next Monetary Policy Committee (MPC) meeting. This is sheduled for next week as expectations are high for a cut in the central bank’s key interest rate.

The two parliaments in the country, the Senate and the House of Representatives, passed a record 9.12 trillion naira ($29.8 billion) budget for 2018 on Wednesday aimed at boosting growth in West Africa’s biggest economy six months after it was presented by the executive. This comes a couple of months before the next presidential election.

Growth has been fragile since emerging from the country’s first recession in 25 years. The Central Bank’s Monetary Policy Committee (MPR) had taken the decision to raise the key interest rate to 14 percent in July 2016 in order to rein in inflationary pressures, and has since held it at that level. At 14 percent, Nigeria’s MPR is currently at its highest in at least 12 years.

Delays in passing budgets, caused by wranglings between the executive and legislature, have hindered the implementation of previous spending plans and stunted the growth of the economy. It has also limited the room for decision making by the MPC.

However, with the passage of the budget and Nigeria recording its lowest inflationary rate in 26 months at 12.48 percent, the MPC now have much more room to cut the MPR. Lowering the rate could increase domestic production and stimulate economic growth in the country. The inflation rate has taken a downward trend, decreasing to 12.48 percent in April and 0.86 percent points less than the rate recorded in March 2018, which was 13.34 percent.

“At this time, yes, we are still in the mode of tightening…but I can assure all of us that we will not tighten perpetually, that at some point, we will begin to loosen and I believe that those financial accommodation period are coming on very, very soon,” CBN Governor, Godwin Emefiele said earlier this year in Washington.

But there are risks. Monetary policy directions have been frustrated in the current administration by the weak implementation of fiscal policies and the current budget also faces the risk of unproductive spending in the lead up to the election next year. This is the major risk members of the MPC would consider before lowering interest rates. Also, consumer prices are still vulnerable and food index increased in April occasioned by increases in prices of potatoes, potatoes, yam and other tubers, fish, bread and cereals, oil and fats, vegetables, coffee, tea and cocoa, meat, milk, cheese, and eggs.

A favourable end to 2018 for the Nigerian economy would be “predicated on the quick passage and effective implementation of the 2018 budget, improved security, foreign exchange market stability as well as favourable crude oil prices,” the MPC noted in the communique released after the last meeting. And that still holds true.

The next MPC meeting is scheduled for 21- 22 May 2018, according to the Central Bank of Nigeria.


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