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The behemoth
eventually bestirred itself. Except that this elephant could only give
birth to a mouse. The decisions reached last week by Central Bank of
Nigeria’s rate setting committee wrong-footed every pre-meeting
commentary. It was a pre-general election meeting, and giving the
uncertainty surrounding the elections, who knows, it may be the last
before the elections. Thus, election-related spending was expected to
entertain Monetary Policy Committee members. Although for the most
part, reports on the economy indicate that it is ticking away at a
decent pace (if not the furious gallop required to meet the Millennium
Development Goals) key sectors are barely keeping afloat. Incidentally,
the CBN’s remit is one of the most straitened of these ailing sectors:
too many dead men walking! Accordingly, since August last year, the
apex bank has struggled to ensure that the zombies do not hurt the
living, including through offering guarantees on all transactions on
the interbank market.

However, while this
“de-risking” has put a floor beneath a floundering industry, its
unintended consequence has been to constrain the process of financial
intermediation. Now, everyone agrees that this process is a basic need
if this economy must save at the levels consistent with its need for
investible funds, and thereafter, allocate such savings optimally. The
CBN has tried to meet this latter bill by arranging to clean up the
industry’s balance sheets, in such a way that the living-dead receive
fresh infusions of capital, and along with their better situated peers,
are then able to resume lending to the economy – preferably the private
sector. Unfortunately, its best efforts have been frustrated by a
lengthy legislative procedure, and the Asset Management Corporation set
up to take over the industry’s bad loans will, on the best assumptions,
now take-off sometime next year. In between, the apex bank has owned-up
to its impotence insofar as it comes to tinkering with the economy’s
short-term interest rates, and with respect to the surfeit of bank
liquidity that has pushed rates in the industry to unprecedented lows.
We’ve also heard that the “focus of the reform measures in the banking
sector is to impact the overall efficiency and stability of the system
in a manner that will ensure that banks play their appropriate roles as
transmission channels for resources to the real sector.” It is, on this
argument, therefore, government’s responsibility to ensure a conducive
environment for real sector growth.

Now, as we
approached last week’s meeting of the monetary policy, not only had
nothing changed in this dynamic, but the spectre of an election year
hung over all. Most people who cared to reflect on these issues were
thus justified in their reduced expectations of the committee’s
meeting. The MPC duly surprised, by tightening monetary policy!
Remarkably, the main tool for this is not the 25 basis points (one
hundredth of a percentage point) increase in the policy rate (MPR).
There is no known relationship between this rate, and the rates at
which banks reward depositors and price their risk assets. Instead, the
policy rate hike reinforced the central bank’s concern with rising
inflation. Ahead of the meeting provisional figures showed the consumer
price index moving from 13 per cent year-on-year in July this year to
13 per cent in August.

There is also good
reason to worry that both election-related spending this year, and the
liquidity-boosting activities of the Asset Management Corporation
(AMC), sometime next year, could exacerbate inflation going forward.How
does the tokenism implied by the MPR rise help anchor inflation
expectations? The jury is not likely to come in soon on this question,
at least until the apex bank has a handle on the channel(s) through
which changes in the policy rate bring about changes in real variables
in the economy. Still, there is much more clarity on the effect of the
2% increase in the returns banks expect to earn from overnight funds
kept with the central bank. Given that this is the new opportunity cost
of transactions in the money market, it is a safe bet that interbank
rates will go up.

Banks that currently lend in the market should witness an increase
in their interest income. And the only reason why borrowers in the
market will continue to have credit extended them is the fact of the
existing CBN guarantee.However, if other rates (deposits, bonds,
treasury bills) rise, then banks could have more problems.