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CBN on watch-and-see game holds MPR at 13.5% amid global uncertainty

… Projects less output growth in 2020

…Urged NASS to not increase oil price benchmark

In what seems like a ‘watch-and-see game’, the Central Bank of Nigeria (CBN) on Tuesday retained the benchmark interest rate (Monetary Policy Rate, MPR) at 13.5 percent in a resolve to allow time for its recent policy measures to permeate the economy.

The latest of such policy measures is the six initial policy response to combat coronavirus, which include the reduction of interest rate on all its intervention funds from 9 percent to 5 percent per annum for one year, effective March 1, 2020, regulatory forbearance for deposit money banks, strengthening of Loan to Deposit Ratio (LDR) policy, credit support for the healthcare industry and a one-year extension of the moratorium for all CBN’s intervention facilities.

After the two-day Monetary Policy Committee (MPC) meeting, all the members also unanimously voted to keep other parameters unchanged. Consequently, the cash Reserve Ratio (CRR) was retained at 27.5 percent, the Liquidity Ratio at 30 percent as well as the asymmetric corridor around the MPR at +200 and -500 basis points.

“The choice to hold considered the loan to deposit ration and the CRR policy which sterilize excess liquidity in the banking system, hence an increase in the MPR would have been counterproductive,” said Godwin Emefiele, governor of the CBN.

The committee felt that tightening will result in unreining input in the rising trend in inflation and that it will support reserves creation.

Nigeria’s inflation rate rose to 12.13 percent in January 2020 from 11.98 percent recorded in December 2019.

However, Emefiele said tightening would reduce money supply and limit deposit money banks’ credit creation capacity, thus resulting in increasing the cost of credit with adverse impact on output growth. Tightening will also result to a reduction in aggregate demand as a fall in aggregate consumption will result to output compression, whereas at this time policy emphasis should be on stimulate aggregate supply and demand both already weaken by COVID19.

“No surprises from the CBN’s monetary policy committee, with the CBN holding all parameters unchanged, largely as expected,” Razia Khan, managing director, Chief Economist, Africa and Middle East Global Research, Standard Chartered Bank, said.

In respect of loosening, the committee felt it would stimulate the economy in the short term and boost aggregate supply and demand. Nevertheless, the committee was of the view that there was a need to be cautious in loosing given the fact that it will exacerbate the already worsening inflationary condition resulting inn massive pressure on reserves and the exchange rate.

Bismarck Rewane, Chief Executive Officer, Financial Derivatives Company said the MPC rate is an anchor rate that anchors all other rates.

“Even if we increase it or reduce it the banks will not reduce lending rates so what is the use of the MPR? The whole point of the MPC meetings is to influence behaviours, or make investors react in a certain way at the end of the day. The discussion is about what they can do with their policies right now given the coronavirus,” Rewane said.

Based on the current downturn in oil prices, Emefiele said staff projections indicate that output in the 2020 would be less than earlier envisaged. The major downside risks to the outlook  include: the continued spread of COVID-19; further decline in crude oil prices and the reduction in accretion to external reserves; reduced government revenue leading to weak aggregate demand; declining non-oil receipts; as well as infrastructural and security challenges.

He said these headwinds will be partly mitigated by the timely and effective response of the monetary and fiscal authorities in containing the spread of the COVID-19 viral infection, the recalibration and adjustment of the 2020 Federal Budget to the revised thresholds while pegging expenditure to critical sectors of the economy, adoption of a new fiscal regime to encourage the build-up of fiscal buffers; sustained CBN interventions in selected sectors; enhanced flow of credit to the real sector, and deliberate policies to diversify the Nigerian economy.

The MPC members urged the National Assembly to avoid the tendency of increasing the benchmark price of oil in the federal budget as this usually result in the adoption of unrealistic budget re-estimate.

The committee cited the potentials for foreign direct investment flows to the Nigerian auto, manufacturing, aviation and rail industries which the country can take advantage of.

Lanre Buluro, Director and Head of Sales, Chapel Hill Denham said  the decision to hold the MPR is very surprising. “What’s the value of the MPR? Is it the best bank rate for lending? It is quite relevant in the grand scheme of things although banks might not necessarily follow but usually there is this moral suasion about numbers and how some people behave in some kind of way around that number,” Buluro said.

Abdulrahman Yunusa, member, governing council of the Chartered Institute of Bankers of Nigeria, said “as a banker I will say that is quite disappointing. The job of the MPC is to clarify whatever they are trying to signal and also trust that as rational economic base people are going to take a cue from that”.

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