Tuesday, May 24, 2022 / 07:59 PM / Central Bank of Nigeria / Header Image Credit: EcoGraphics
The Monetary Policy Committee (MPC) met on the 23rd and 24th of May 2022 confronted with declining global growth and heightened uncertainties associated with adverse price developments across the world. These developments partly reflect the aftermath of the ongoing war in Ukraine, the backlash from the numerous sanctions imposed on Russia by major Advanced Economies, as well as persisting supply chain disruptions in major trading routes. At the same time, the Chinese economy remained confronted with the lingering impact of the COVID-19 pandemic, total lockdown of major cities, significant distortions in the property market and modest inflationary pressures. Consequently, Advanced Economy and Emerging Market Economy central banks alike, are switching to monetary tightening to curb the sharp rise in inflation globally.
Even as global output growth recovery moderates, the domestic economy is expected to remain on the current path of recovery through 2022. This is hinged on the continued impact of stimulus by both the monetary and fiscal authorities to support the economy following the outbreak of COVID-19 pandemic. The Committee assessed these developments and the outlook for the rest of the year.
Eleven (11) members of the Committee attended this meeting.
Global Economic Developments Global output growth commenced a broad slowdown in the first quarter of 2022, as a result of the conflict between Russia and Ukraine, after recovering considerably in 2021. This led to massive supply constraints, with the backlash of sanctions against Russia creating huge macro-economic imbalances for several countries. Consequently, the uncertainties that have arisen are buoyed by the resumption of the spread of the COVID-19 pandemic in China, a key hub of global manufacturing. This has given rise to upside risks to inflation and downside risks to growth.
In addition, the huge amount of stimulus deployed by various countries to ease the downsides of the COVID-19 pandemic, particularly in 2021, has predisposed the global economy to huge debt levels, considering the current burgeoning global private and public debt portfolios. Central banks in both the Advanced and Emerging Market Economies have thus commenced monetary policy tightening to curb rising prices. This could impact the recovery negatively and result in a rise in debt default as global financial conditions tighten. Furthermore, China has also re-introduced constraining measures to mitigate the spread of a new wave of the COVID-19 pandemic within its major industrial cities, resulting in a slowdown in production. In light of these headwinds, the International Monetary Fund (IMF) downgraded its forecast for global output growth for 2022 and 2023 to 3.6 per cent apiece from 4.4 and 3.8 per cent, respectively, reflecting the severity of setbacks to the global recovery.
Inflation continued to rise unabated across several Advanced Economies and is projected to remain high, at least in the medium term, as food and energy prices pushed higher to levels not previously recorded in four decades. This is due to tightening supply amidst closure of major trade routes that supply inputs for food and fertilizer, as well as the high price of energy. In the Emerging Market and Developing Economies (EMDEs), inflation also remained high due to a combination of persisting high food and energy prices; supply chain disruptions associated with the impact of sanctions against Russia; exchange rate pressure; capital flow reversals; as well as underlying legacy constraints.
In the global financial markets, investor confidence is gradually being restored, evidenced by portfolio rebalancing with the gradual decline in gold price. The demand for advanced economy equities and bonds has improved with the commencement of interest rate lift-off led by the US Fed and the Bank of England, resulting in the outflow of capital from emerging market securities. Global financial conditions are thus, expected to tighten in the near term, as risk-averse investors reassign substantial portions of their portfolios from perceived riskier, though more rewarding Emerging Market securities to less risky advanced economy securities.
In general, the global economy and financial markets, are confronted with significant risks in the medium term as the huge build-up of both private and public debt may push several fragile economies into a new era of recession.
The broad outlook for both the global and domestic economies in the medium term, remains clouded with uncertainties arising from the lingering war between Russia and Ukraine, the unfolding impact of the extensive sanctions imposed by several countries on Russia, and the downside risks from the continued spread of the COVID-19 Pandemic.
Global growth is thus confronted with significant headwinds which may derail the current projection further. The persisting rise in inflation, is also set to undermine the recovery of output growth, due to the associated build-up of uncertainties around the cost of inventory and other production inputs. The rise in global debt is also an unfolding dilemma which policy makers must carefully evaluate and address to avert a near-term global financial crisis. In summary, while global aggregate demand remains strong and growing, the numerous supply-side constraints will continue to undermine the recovery effort, at least in the short to medium term.
In the domestic economy, data on key macroeconomic variables indicate that the recovery of output growth will continue, probably at a more subdued pace, considering the unfolding domestic and external shocks to the economy. Domestic price development is, however, expected to maintain an upward pressure in the light of the build-up of increased spending related to the 2023 general elections.
Consequently, the Nigerian economy is expected to grow, in line with CBN forecast of 3.24 per cent in 2022. However, the FGN forecast is at 4.20 per cent, while the IMF projects Nigeria’s growth in 2022 to be 3.40 per cent.
The Committee’s Considerations
At this meeting, the MPC noted the risks confronting the global economy, as those associated with, not only inflation and prices, but also include risks associated with weakening growth prospects across the world.
The Committee observed that whereas post-pandemic policy support has remained broadly expansionary, at least, from a fiscal standpoint, the sharp rise in inflation across both the Advance & Emerging Markets Economies has generated growing concern amongst central banks, as the progressive rise in inflation, driven by rising aggregate demand and wage growth, is putting unsustainable upward pressure on price levels.
Consequently, major central banks such as the US Fed, Bank of England, European Central Bank, and Bank of Canada have provided strong guidance for a progressive shift away from monetary policy accommodation to drive market interest rate upward, which may ultimately impact capital flow away from Emerging Market Economies.
On another hand, MPC noted that the war between Russia and Ukraine has resulted in significant disruption of the global supply chain, at a time when the global economy is still confronted with downside risks to growth associated with the Covid 19 pandemic. In addition to this, global trade has been impacted by the series of restrictions imposed by NATO countries and its allies against trade with Russia. This has increasingly fragmented the global economy, imposing huge strains on the tepid post-pandemic recovery. Only recently, China, the USA, and South Africa are seeing a renewed spike in COVID-19 infections. As a result, the Chinese government recently re-introduced lockdown in major industrial cities, to forestall the spread of the pandemic: further disrupting the supply chain crisis. In the view of the MPC, these two risks pose great challenges to rising inflation globally.
For the domestic economy, the MPC noted with delight that the GDP grew by 3.11 percent in Q1, 2022 (y-o-y), highlighting a steady recovery for the 6th consecutive quarter. Quarter on quarter real GDP grew by 9.36 percent, a slight moderation from 11.07 percent in the previous quarter. The MPC however was concerned about the somewhat aggressive rise in inflation by almost 90 basis points in April, 2022. To dampen the expectation of the inflationary pressure, MPC decided on the need to take a shift from its historically cautious approach on interest rate, to a policy rate hike, while still adopting an accommodative approach to development finance initiatives that have supported the growth of the economy and sustained recovery. The MPC is of the view that rates on the development finance initiatives of the Bank should remain at 5 percent till March, 2023.
Consequently, as regards the decision on whether to hold. tighten or loosen, MPC feels that loosening in the face of the rising policy rates in Advance economies may result in a sharp rise in capital outflow and faster dry-up of foreign credit lines. MPC also feels that loosening could lead to further liquidity surfeit and inflationary pressure. S to whether to hold, MPC feels its stance would strengthen the perception that the CBN has abandoned its primary mandate of taming inflation.
On the need to tighten, MPC feels that tightening would help moderate the inflationary trade-off from the steady growth recovery so far. MPC also feels that tightening would help rein in inflation before it assumes a galloping trend, considering the progressive increase in headline inflation (m-o-m), particularly with the sharp 90 basis point increase in April, 2022.
Furthermore, MPC feels that tightening would narrow the negative real interest rate margin, improve market sentiment and restore investor confidence. Equally, members believe tightening would moderate inflationary pressure pass-through to exchange rate depreciation and moderate the speed of capital flow reversal, provide incentives for foreign capital inflows and sustain remittances. Lastly, tightening could moderate government domestic borrowing, as government debt servicing to revenue ratio increased significantly in recent times, threatening debt sustainability.
The Committee’s Decision
Members expressed deep concern about the continued uptrend of inflationary pressure. Despite the gradual improvement in output growth. The Committee noted that the current rise in inflation may be inimical to growth, and thus hinder the full recovery of the economy. While the MPC identified several supply-side factors which may be contributing to inflationary pressure, emerging evidence shows that money demand pressure is on the rise and is unlikely to abate until the 2023 general elections are concluded. The dilemma confronting the Committee at this meeting, therefore, is how best to drive down domestic prices while continuing to support the fragile recovery.
In the current circumstance, the Committee was of the view that it was confronted with the choice of either to hold all policy parameters constant to allow previous policy measures to continue to support growth or tighten the stance of policy to curb money demand growth and upward movement of domestic prices. A loosening option would likely result in an increased liquidity surfeit, rise in inflationary pressure, and further pressure on the exchange rate.
The choice of holding, in the view of Members, would not only continue to support growth, even though moderately, but will also allow the growth of money demand to continue at the current pace, leading to the uptick in inflationary pressure. While growth concerns remain paramount to the Committee, the persistent uptick in domestic price levels is clearly a downside risk to growth, that must be addressed urgently.
While it may seem contradictory to raise rates in the face of fragile growth, this is the dilemma that most Central banks around the world are grappling with at the moment. Yet, on balance, it is quite clear and compelling that tackling inflation is more urgent in the sequence of policy objectives. In this regard, the MPC urged the Bank to redouble its efforts at supporting the priority growthenhancing sectors of the economy while urging the Federal government to do more to provide a safe and secure environment for economic agents to boost activities and growth.
After carefully reviewing the developments of the last two months and the outlook for both the domestic and global economies, as well as the benefits and downsides of each policy option, the Committee decided to raise the Monetary Policy Rate (MPR) to rein in the current rise in inflation as Members were of the view that the continued uptrend would adversely affect growth. The Bank further reaffirmed its commitment to continue to provide support to priority sectors as the need arises to support growth until the current upward pressure in price development abates.
The Committee thus decided by unanimous vote to raise the Monetary Policy Rate (MPR). Six (6) members voted to raise the MPR by 150 basis points, four (4) members by 100 basis points, and One (1) member by 50 basis points.
In summary, the MPC voted to:
- Raise the MPR to 13.0 per cent;
- Retain the asymmetric corridor of +100/-700 basis points around the MPR;
- Retain the CRR at 27.5 per cent; and
- Retain the Liquidity Ratio at 30 per cent.
Godwin I. Emefiele
Governor, Central Bank of Nigeria
24th May 2022