CBN Cuts Interest Rate

The Monetary Policy Committee of the Central Bank of Nigeria on Tuesday reduced the Monetary Policy Rate (benchmark interest rate) from 13 per cent to 11 per cent. The decision was announced by the CBN Governor, Mr. Godwin Emefiele, while addressing journalists shortly after the MPC meeting held at the central bank’s headquarters in Abuja. This is the first time in about six years that the committee will be reducing the MPR, which is the anchor rate at which the CBN lends money to Deposit Money Banks. The committee, according to the governor, also voted to reduce the Cash Reserve Requirement from the current 25 per cent to 20 per cent as well as changed the symmetric corridor of 200 basis points around the MPR to an asymmetric corridor of +200 basis points and -700 basis points, around the MPR. Explaining how the decisions were arrived at, the governor explained that the MPC, by a vote of eight to two, reduced the MPR from 13 per cent to 11 per cent, while two members voted for a retention of the rate at 13 per cent. For the CRR, he said seven members voted to reduce it from 25 per cent to 20 per cent, while three elected to hold the rate.

In addition, Emefiele said eight members voted for an asymmetric corridor of +2/-7 per cent, while two voted to retain the symmetric corridor of +/-2 per cent around the MPR. In arriving at the decisions, the governor said the committee considered the weakening fundamentals of the economy, particularly the low output growth, rising unemployment and the uncertainty of the global economic environment. He said, “The MPC noted the fragility of the domestic macroeconomic environment; reflected partly in low output growth, soft oil prices, low credit to the high employment elastic sectors of the economy, and sustained inflationary pressure, which, however, softened moderately in October. “The MPC was particularly concerned that the previous liquidity injections embarked upon through lowering of the CRR in the last MPC has not transmitted significantly to improved credit delivery to key growth and employment in sensitive sectors of the economy.

“Rather, more credit was to sectors with low employment elasticity. While noting the imperative of complementary fiscal policies to augment monetary policy under the circumstance, the monetary policy must remain bold in charting the desired course that will stimulate sustainable output growth in Nigeria.” On the high rate of unemployment in the country, the CBN governor noted that the MPC evaluated various options for ensuring increased credit delivery to the key growth sectors of the economy, capable of generating employment opportunities, and improving productivity and growth. The Committee, he added, also underscored the need for banks, to ensure that measures taken by the CBN to inject liquidity and stimulate the economy adequately translate into increased lending to the sectors with sufficient employment capabilities and the potential to generate growth.

The areas where funds will be channelled into, according to him, are the real sector, infrastructure, agriculture and solid minerals. Emefiele explained, “The MPC agreed that going forward, any attempt by the CBN at easing liquidity into the system shall be directed at targeting the real sector, infrastructure, agriculture and solid minerals. “The MPC further directed the bank’s (CBN) management to put in place necessary measures/regulations to ensure strict compliance by the DMBs. This is aimed at ensuring that employment and productivity is stimulated, while also moderating prices.”

When asked about the impact of the reduction of the CRR on monetary easing, the governor said this would enable the banks to channel more funds into targeted sectors under the supervision of the CBN. Meanwhile, economists and financial experts on Tuesday reacted to the policy decisions of the Central Bank of Nigeria’s Monetary Policy Committee, saying the moves might necessarily achieve the intended objective to stimulate economic growth and boost job creation. According to majority of the economists, the MPC’s decision to reduce key rates and allow more funds in the banking system does not mean that banks will lend more to the critical sectors of the economy so as to stimulate investment and boost employment. Rather, they said the additional N300bn to N350bn that would be released to the banking sector would create inflationary pressure and cause the naira to depreciate further at the parallel market.

“The challenge, however, is that the naira is still dangling in the forex market and is likely to slip further because of the impending money supply saturation,” an economist and Chief Executive Officer, Financial Derivatives Limited, Mr. Bismarck Rewane, said. Economists at Afrinvest West Africa Limited said the banks were already reeling under high default rate by companies and might not be willing to lend even with the fresh funds in the system. They noted that the increased liquidity already in the system had not compelled the banks to lend in the last few months.

“While the decisions by the MPC ensued from a need to grow the real sector through increased lending by banks, the decision on lending will continue to be governed by risk considerations with the banks more conservative in taking risks, given the macroeconomic headwinds,” the Afrinvest experts noted. An expert at Ecobank Nigeria, Mr. Kunle Ezun, said the MPC decision would need to be complimented by the fiscal authority if there would be lending to the real sector. Other economists, however, believe that the MPC decision was a right move. Analysts, who spoke to one of our correspondents on the matter were the Head, Banking and Finance Department, Nasarawa State University, Keffi, Uche Uwaleke; Registrar, Chartered Institute of Finance and Control of Nigeria, Mr. Godwin Eohoi; and President, Institute of Fiscal Studies of Nigeria, Mr. Godwin Ighedosa.

Uwaleke commended the central bank for the decision, stating that the move would assist in the reduction of the cost of funds as well as stimulate investments in the stock market. He said, “The reduction in MPR from 13 per cent to 11 per cent will mean that interest rate will come down and this is good news for companies as it will assist in reducing the cost of capital for some of this businesses that borrow funds. “Whenever you have liquidity in the financial market, you will have a corresponding increase in the capital market through volume, and this will help the capital market to rebound. The reduction will also allay the fears that the economy will slide into recession, because a lot of productive activities will now pick up.” Eohoi said the move would lead to a significant diversification of the economy as more funds would now be channelled into agriculture and solid minerals. Ighedosa said, “This is a welcome development because we have been advocating for a reflation of the economy due to unemployment and poverty. “This is good because it will help to diversify the economy. The cost of borrowing will reduce and it will assist in boosting the capacity of companies and increase private sector investment.”