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|Key Highlights Of The Cbn's Monetary Policy Committee Meeting July 2016 by Angelstartups(f): 5:38pm On Jul 26, 2016|
Nigeria’s Monetary Policy Committee (MPC) met on July 25th and 26th, 2016 to review domestic and international economic conditions in order to determine the policy direction for the next two months. Consequently, the Committee’s decision was as follows:
· The Monetary Policy Rate (MPR) increased to 14.00 percent from 12.00 percent
· Cash Reserve Ratio (CRR) retained at 22.50 percent
· Liquidity ratio retained at 30.00 percent
The increment in MPR may be for two reasons:
To manage inflation
To attract FDI/FPI
For us, this is our position: BAD, BAD, BAD, for Nigeria's economy! Why?
The inflation in Nigeria is largely cost-push inflation. By the way, there are two forms in which inflation could happen:
Cost-push inflation occurs simply when the cost of production goes up. This means the cost of raw materials, cost of goods sold, cost of service. When this happens, because businesses are not charity bodies, they simply pass on the cost to final consumers; by increasing the price. When this happens, consumers begin to adjust and recalibrate their spendings, at some point, their demand may begin to even slow down, thereby affecting the revenues of businesses.
On the flip side, Demand-pull inflation occurs when there is significantly high level of liquidity within the economy (market) and therefore too much money is chasing fewer goods/ services than necessary.
Nigeria's inflation has always been cost-push, which means increasing the costs of production, will further create higher rates of inflation, while reducing the costs of production, will likely create a manageable rate of inflation.
By raising MPR by 200 basis points, from 12% to 14%, what the CBN has done, is raise cost of borrowing for businesses. Banks track MPR as a benchmark for their loans and advances, in an economy that is already bleeding, with banks already sneezing and some coughing, we expect banks to adjust their lending rates accordingly, (with the exception of banks that are sneezing/ coughing already, that may scare their customers away and they therefore may not want to raise their lending rates).
Some may argue that inflation is already as high as 16.5% and therefore banks have already priced that in, very valid, however, in an environment like Nigeria where businesses/ individuals like to cash in on any news of rising cost/ rates, it is always an excuse and an opportunity to further increase lending rates.
If and when lending rates (borrowing cost from the angle of the borrower) go up, cost of production will then go up which will further lead to rise in prices and then another round of high level of inflation occurs and then we are back to square one. And then two months later, you are talking about raising MPR again, and the cycle goes on, and on and on.
When you raise MPR to tame inflation, it is when such inflation is largely demand-pull, then you see capital flowing from households/ individuals to fixed income assets, thereby mopping up high level of liquidity within the system and the need to bargain hard increases, curtailing artificial price increase.
Note: Nigerian economy will continue to roll in a circle, only when and only when, the cost of doing business becomes globally competitive, thereby stimulating import substitution and then export promotion, the two 'long-term' solutions staring us in the face. Cost of doing business in Nigeria will be competitive when Efficient Power System, Modern Transport Networks, Knowledgeable and Healthy Human Capital and Strong Rule of Law, are put in place, through Expansionary fiscal policies.
What the MPC will continue to do at best is, moving in 'silo', when in actual fact, they should tag-along together with supporting Fiscal Policies.
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