CBN frees N700bn to real sector as analysts expect rates to fall

The Central Bank of Nigeria (CBN) reduced its benchmark interest rate for the first time in six years, and cut the cash reserve ratio (CRR) in a move designed to provide between N500 billion and N700 billion to be channeled to employment generating sectors- agriculture, infrastructure and solid minerals.

It is expected that lending rate that has been hovering between 26 and 30 percent would come down and the real sector would benefit from  the attendant growth. 

“We have attained the end of the tightening cycle and begun to stimulate growth, and create employment in the economy,” Emefiele said, while answering questions from reporters.

“The liquidity arising from the reduction in the CRR will only be released to banks that are willing to channel it to lending to four key areas of the economy, which are the real sector, agriculture, infrastructure and solid minerals,” Emefiele added.

Banks would however be expected to weigh between credit and liquidity risks, as they would be forced to lend to the real sector since it would not be profitable to keep their idle funds with the CBN.

Ayodeji Ebo, head investment research at Afrinvest, said last night, that this should however be watched closely, as the likely hike in rate by the United States (U.S.) Federal Reserve System (The Fed) next month could lead to capital flight, as investors might opt for instruments with higher yields. Also, the freeing of the cash and expansionary 2016 fiscal year could spark inflationary pressures.

The key monetary policy rate was cut to 11 percent from a record high of 13 percent, while the cash reserve ratio (CRR) was reduced to 20 percent from 25 percent, Emefiele told reporters on Tuesday in Abuja.

The CBN also broadened its interest rate corridor to 200 basis points above the benchmark rate, and 700 basis points below, Emefiele said.

This means the regulator will borrow from commercial lenders at 4 percent and lend to them at 13 percent.

The expected credit from the 5 percent CRR cut may range between N500 billion to N700 billion, say analysts.

“At a mid-point, I’ll expect about N550 billion,” Abiodun Keripe, head of research and strategy at Elixir investment partners, said in response to questions.

“Expectedly, this MPC move implies a lower lending rate and already fixed income yields are down. Given that there’s a condition for earning the credit from the CRR cut, I’ll expect a muted impact on yields. However, I will expect to see lending rates to the four targeted sectors come down. At the other end of the equation is the impact of all these on bank’s earnings,” Keripe said.

Razia Khan, managing director, chief economist, Africa Global Research, Standard Chartered Bank, London said, “Following the confirmation of sub-3% real GDP growth in Q3-2015, further CBN easing seemed likely. Money supply growth has also been weak, with broad money on an annualised basis contracting by 5%.

“However, the nature of the easing – with a cut to both the MPR and the CRR – may have implications for future policy decisions. First, a cut in the MPR just ahead of any liberalisation of Nigeria’s FX regime, with the attendant risk of further Nigerian naira (NGN) weakness would have been unusual.

“The inference from the policy choice is that there are no plans for imminent change to the fixed FX regime currently in place. Second, the move to an asymmetric corridor around the monetary policy rate formalises the de facto easing that had already been in place since the CBN reduced its open market operations (OMOs) in July.

“In fact, interbank rates have trended outside of this range in recent weeks, reflecting excess liquidity in the Nigerian market. Unless new OMOs are resumed, this is likely to continue to be the case. The easing measures are aimed at boosting Nigeria’s real economy. How successful they are, will depend on how much other bottlenecks currently constraining real-sector activity can be overcome. The availability of FX for imported inputs will be closely monitored.”

Usoro Essien, research department, Greenwich Trust Limited said “The reduction in the CRR on Private Sector Deposits will further relieve DMBs from liquidity squeeze and increase the need for banks to match additional liabilities with assets.

“The introduction of the asymmetric corridor will reduce the incentive for banks to place money with the CBN at its Standing Deposit Facility (SDF), as it will now attract only 4.0% interest rate per annum (11-7%).”

On the real sector, Usoro said, “Deposit Money Bank’s (DMBs) will need to increase their lending to the real sector, as M2 will rise by 40.0% with limited fixed income instruments available. DMBs will look to create risk assets from genuine economic agents with low gestation periods (Trade, Manufacturing & Construction etc.).

According to him, this move will pave the path for government’s borrowing needs in 2016 to drive its spending plan and repay its existing debt. He added, “These two indicators (Inflation and Exchange Rates) will likely deteriorate in the medium-long term, as long as the accommodative policy persists.”

Aigboje Higo, managing director, Capital Bancorp said, “It will be positive because if lending rates are trending downward, in capital market, it will be positive.”

Central Banks in Africa have raised interest rates this year, to ward off inflation threats stemming from weaker currencies. Policy makers in Nigeria, Africa’s biggest oil producer, have however chosen to protect the naira in the face of plunging crude revenue, by imposing foreign-exchange restrictions instead.

Lower interest rates may help the government as it ramps up borrowing to finance its budget.

President Muhammadu Buhari asked lawmakers last week to approve a supplementary budget for this year that seeks to increase spending by 10 percent and boost borrowing by an additional N1.6 trillion ($8 billion).

“This can reduce borrowing costs for the government,” Bismarck Rewane, an economist and CEO of advisory firm, Financial Derivatives company, said.

“The expected growth in M2 from the central banks easing should increase inflation expectations. It remains to be seen what level of inflation the CBN is willing to accept, as the economy moves along a higher growth path.”

Inflation slowed for the first time in almost a year in October, to 9.3 percent, staying above the bank’s target band of 6 percent to 9 percent.

Emefiele said members of the bank’s monetary policy committee (MPC) had voted by a margin of eight to two, in favour of the reduction in MPR.

The central bank has been injecting cash into the banking system since October in a bid to ease liquidity and stave off recession in Africa’s top oil producer, which has been hit hard by the sharp fall in crude prices over the last year.

The economy expanded 2.8 percent in the third quarter from a year earlier, slightly higher than the 2.4 percent recorded in the previous quarter.

Emefiele said some banks seemed to be using the funds from an earlier cut in CRR to invest in bonds, rather than lending to households and businesses, which meant September’s cut in the cash reserve ratio had not stimulated more lending.

PATRICK ATUANYA