WHY CBN MUST MAINTAIN 12% MPR FOR 2012 - KHAN

The Central Bank of  Nigeria (CBN) is expected to maintain its benchmark interest rate, the monetary policy rate at 12 per cent throughout this year, says Razia Khan of Standard Chartered Bank.

'For now we expect the monetary policy rate to be maintained at 12%, most likely until the end of the year,' she said in response to the decision of the Monetary Policy Committee (MPC) of the apex bank to maintain the MPR at 12 per cent.

In an email response Razia Khan, who is the Regional Head of Research, Africa, Standard Chartered Bank said, 'No surprises in the CBN's decision to keep the Monetary Policy Rate on hold at 12%.'

Citing concerns over the declining growth rate of the Nigerian economy and the potential risk of the euro zone crisis on the Nigerian economy, the MPC decided to suspend further tightening of the money supply and hence left the MPR unchanged.

Khan  said, 'Although the CBN sounded a decidedly more dovish note, we believe that there will be limited room to ease interest rates unless we see a significant external shock with global consequences.   Although m/m inflation in Nigeria has been well-behaved, the CBN nonetheless expects inflation to rise further, with a peak at around 14.5%.

In our view, evidence of weaker domestic agricultural output, combined with the anticipated imposition of tariffs on some imported food items are a significant risk factor for inflation which should continue to rise in the near term.  However, the extent to which this feeds into generalised price pressures should be significantly offset by benign money supply trends and evidence of a cyclical slowdown of sorts in the Nigerian economy.

' For the moment, it is the external risks that loom large.  Even emerging from a period of relative strength in oil prices, Nigeria's FX reserves have risen only very modestly to $37bn.  In view of global risks, and Nigeria's new susceptibility to potential outflows, much still needs to be done to rebuild the economy's external buffers.

'For now we expect the monetary policy rate to be maintained at 12%, most likely until the end of the year.  Although the MPC will watch the 12 month measure of inflation closely, Governor Sanusi's statement that there is 'no need for further rate tightening' will set the context for market behaviour.

This is the clearest statement yet from the CBN on the outlook for interest rates since the partial lifting of the fuel subsidy - a sign that they are comfortable with current inflation risks, but also evidence of their concern about the global outlook and its implications for Nigeria.

Given the balance of risks however, we believe the CBN is still right to maintain a steady interest rate policy, given the questionable effect that any monetary stimulus might have on domestic growth in Nigeria.  The best possible stimulus at this point would be to allow for macroeconomic stability - in particular, a stable exchange rate - and conditions that permit deeper, structural reforms to take place.