MPC: Is there room to cut?

The monetary policy committee meets today to deliberate on actions to take particularly regarding the monetary policy rate. This is the first MPC meeting since the recession was confirmed, although most members already knew it was coming for a while.

The major question is if the MPC should cut the monetary policy rate? To be clear it not an easy choice either way. Ifeanyi Uddin has a good article on the arguments to raise or lower the MPR which hits the nail on the head.

I think it is difficult to argue for a rate hike given the deteriorating (or deteriorated depending on who you ask) conditions in the economy. Not asking for a rate hike is, however, not that same thing as asking for a rate cut. I don’t think a rate cut will be useful either. We all know the FGs borrowing plan this year and that is likely to be the key driver of interest rates for the rest of the economy. Lowering the MPR is likely to be toothless given that reality.

So what can the CBN do? The FX market still needs some fixing. The existence of the large spread between the official rates and the black market still sends all the wrong signals. The signal it sends is that everyone should still be in asset protection mode, and not investment mode. The CBN needs to change that signal.

My verdict for the outcome of the MPC meeting? I think they should hold.

One thought on “MPC: Is there room to cut?

  1. I understand the argument that MPR should be cut given present dire economic conditions but I think much of it is misguided. The dire conditions are largely a product of an inflationary spiral driven by a currency crisis. Cutting MPR does nothing to address this, if anything, it is likely to worsen matters.

    An increase in the money supply driven by monetary easing may simply provide more naira to be used for the purchase of foreign currency as a hedge against naira depreciation. As your subsequent blog post points out, whilst arbitrage incentives remain in place (due to the divergence between the official and parrallel rates), round tripping remains too enticing and any monetary easing may more likely provide ammunition for speculation.

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