CBN seems to have boxed itself into a corner. Inflation at 11.4% is below long run level of 12%. FX: you have the reserves to deal with anything even better you've converged most segments (NIFEX closed today at N349/$) GDP Growth is weak, credit growth even weaker what to do?
Cut MPR? Na we need to impress some people who interpret our policy position via MPR when in actual fact we have cut real policy rate (OMO) down to 12.15% from 18-22% in 2017. But banks are not lending? Try interventions? Banks are bogged down with IFRS 9, low CAR and NPL issues
But credit growth is now negative and cutting rates further risks putting pressure on FX. We really need to do something else growth starts to fall-off and we get into a bind to cut the MPR which we dont really want to cos we need it to impress to FPI guys.
Corporates are now issuing CPs directly bypassing banks. In that case we will simply deploy our intervention funds there. Buy CPs to lower borrowing costs for these big corporates. Technically this is QE for private sector. Well we are supporting credit growth
How will it work i'm not sure but if its secondary market purchases, wider rates will have to compress as well as the body language of the CBN is effectively easing while the face is saying MPR at record 14% is hawkish.
CBN seems to be having a sort of bipolar disorder it has no excuse to tighten but it cannot ease as that will tamper with the FX but it needs to ease. I think this reflects the problem with the dual mandate of keeping the nominal FX rate stable and pursuing price stability.
I think a radical solution is to allow CBN have control over monetary policy and FX reserves but remove the power of FX price determination to another independent body. That way it removes the current confusion the CBN grapples with.
This body should preferably be panel of experts whose job is to determine an FX rate consistent with long run desires as a country to grow manufacturing exports and short run BoP dynamics. They communicate this at the start of each year and CBN sets monetary policy around this.
Else we will constantly be having situations like this. Inflation declined to that 6-9% range btw 2013-2015 but CBN didnt cut rates focused on keeping the nominal FX rate stable. Its the perennial obsession every CBN governor assesses himself on FX. we need to change that
