First the known facts (and in no specific order). At its first meeting this year, the monetary policy committee (MPC) of the Central Bank of Nigeria (CBN) voted to maintain the monetary policy rate (MPR) unchanged at 6% “with the asymmetric corridor of interest rates remaining at 200 basis points above the MPR and 400 basis points below the MPR”. Apparently, going by the MPC’s communiqué after the meeting, the economy grew (GDP) by 6.90% in 2009. The headline inflation rate (now, this is a tricky one, so it helps to quote directly from the MPC’s communiqué) “as measured by the year-on-year increase in the all item consumer price index was 12.4% in November 2009”.
Both monetary aggregates and aggregate domestic credit (net) grew a lot slower than in previous years, and much slower than what the CBN described as its “indicative benchmarks”.
Even though the monetary authority’s policy neutrality did not come as a surprise, it helps to understand why, in the face of evidence that inflation may have rediscovered its bite, the CBN opted to leave its policy rate unchanged. First, given the apex bank’s commitment to improve the “overall efficiency and stability of the (banking) system in a manner that will ensure that banks play their appropriate roles as transmission channels for resources to the real sector” it was always open to debate whether the time had come to rein in the policy of quantitative easing that has seen the CBN continue to drive growth in the system’s liquidity. The current state of some operators in the financial services sector hasn’t been of much help either. Second, the CBN, more than most, is aware that its policy rate is only distantly related to “the retail lending rates of deposit money banks (DMBs)”.
So, while the policy rate has remained at 6% since July 2009 when the MPC reduced it from 8%, banks’ “average maximum lending rate (rose) to 23.1% in November from 22.97% and 22.64% in September and June, 2009, respectively”.
Now, the problem raised by the (absence of a) relationship between the policy rate and retail lending rates is not simply a question of estimating the economy’s policy reaction function - the time it takes from the implementation of a policy and when reactions from the economy kick in. The Bank of England estimates, for example, that “changes in (its) bank rate can take up to two years to have their full impact on inflation”. Granted that the CBN concedes that it is slaving away at reaching a working understanding of this process, the whole problem with the policy rate then comes down to its relationship to inflation.
Retail deposit rates in the country are exceptionally low. Indeed, they are way below the inflation rate. One would have thought that the CBN’s concern with increasing “credit to the growth-enhancing sectors of the economy and therefore, (engendering) an all inclusive growth” would have been matched by policy conditions that conduce to a rapid increase in the economy’s savings pool. But with retail deposit rates at around 4% and inflation where it is, retail depositors in the country lose their shirts just by keeping money with the banks. The spread between banks’ weighted average deposit rates and lending rates is however thinner than is suggested by looking at the figures for retail deposit rates alone, only because banks’ have boosted deposits via pretty expensive tenored funds. These tenored funds are not just dear, they are also pretty unreliable: always in search of higher returns, and hence not really available to create liabilities.
Still, were the policy rate related to any other domestic index, it would have been a pretty useful tool in the apex bank’s struggle to maintain price stability. Inflation would have been within manageable limits, actual and potential depositors would earn a return that encourages further savings, and entrepreneurs and investors would have the assurance of stable monetary conditions in order to pursue new investments. Desirable though all of these are, the apex bank’s recent meeting on monetary policy failed to reassure that it is headed in the right direction. Yet we had hoped. For this was the first meeting of the re-furbished MPC.