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Available economic
indices, ahead of this year’s last meeting of the Central Bank of
Nigeria’s rate-setting committee (the Monetary Policy Committee – MPC),
were not exactly pretty. Both government debt and the fiscal deficit as a
share of GDP were up and growing. Moreover, government had become the
biggest borrower in the economy, and there were signs that its
activities in the market for fixed income securities had begun to
constrict the private sector’s borrowing space.

Inflation remained a
key worry and is likely to worsen, as we head into the harmattan
season. Two things are in play with projected inflation: first,
agriculture is the main driver of domestic prices (according to our
official bean counters), and it is largely rain-fed and subsistence. So,
the dry season would cut into agric production, driving prices up.

A second price also
caused concern, as the MPC’s worthies headed for their meeting tables:
the naira’s exchange rate. Whatever the main drivers of demand are in
the foreign exchange markets (speculation, or front-loading by importers
concerned to secure supplies ahead of a potentially disruptive election
cycle), the rate at which the Central Bank was drawing down on the
external reserves to keep the official foreign exchange market supplied
is not sustainable.

In this
circumstance, what was the MPC expected to do? Tighten monetary
conditions by raising rates. There were two problems with this option.
The first was to decide which is the most important of the policy tools
available to the MPC: the policy rate or the standing facilities’
corridor.

Secondly, could
liquidity conditions in the economy support a rate increase? Or put
differently, are the banks healthy enough to help transmit any rate
movement to the economy? Remember that the CBN has had to maintain its
guarantee on interbank transactions to keep the market ticking.

Still, the biggest
unknown in predicting the MPC’s response was always political. Could the
CBN find the nerve to move rates up when its political paymasters would
rather not? A great part of the apex bank’s dilemma over the years has
been the economic nous (or lack thereof) of the managers of the fiscal
side of the economy.

The Obasanjo
administration long argued, for instance, that the main burden on the
real sector was its lack of access to bank lending. It then focused its
best efforts on holding interest rates down, while its revenue and
spending activities fed rampant increases in domestic prices. True, we
cannot forget that the CBN has both statutory and operational autonomy.
But we must also remember that it does not have as good enough a handle
on the monetary transmission mechanism as it needs to argue its corner
with the political authorities.

In the end, the CBN
performed a veritable conjurer’s trick! According to all the
post-meeting media reports, the CBN’s rate-setting committee left
interest rates unchanged. The MPC did vote to hold the monetary policy
rate (MPR) at 6.25%. But it also adjusted the corridor around the MPR to
+/- 200 basis points, “implying Standing Lending Facility (SLF) rate of
8.25%, and Standing Deposit Facility (SDF) rate of 4.25%”. The denizens
of Aso Rock may have slept better Tuesday night, persuaded that Mallam
Sanusi Lamido Sanusi was not minded to rock the economic boat faster
(and/or more violently) than the political lullabies that the country is
being asked to go to bed on.

But did nothing
really happen? Look closely at the details. Even the media reports have
cat-type phalanges poking out of the bag several paragraphs down. Every
bank treasurer that I have spoken with on this issue since Tuesday
anticipates a rise in retail rates on the back of the apex bank’s
decision to increase its standing deposit facility by 1%. What this does
is push up the opportunity cost of interbank lending. Apparently,
therefore, the key to understanding the CBN’s policy response is the
movement in the standing facilities corridor around the policy rate.

Does this then mean
that the MPR no longer matters? Or has the monetary authority given up
on the attempt to tie the policy rate to market rates? Most
commentators would argue that as a lever on the economy, the policy rate
never really mattered. Expect further tightening ahead. But do not
expect the incidence to fall on the policy rate.