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CBN in watch-and-see, holds MPR at 13.5% as global uncertainty grows

… Projects less output growth in 2020

The Central Bank of Nigeria (CBN) on Tuesday retained the Monetary Policy Rate (MPR), the benchmark interest rate, at 13.5 percent in a resolve to allow time for its most recent policy measures to permeate the economy.

Its policy measures are the six initial responses to combat the coronavirus pandemic, which include the reduction of interest rates 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 its Loan to Deposit Ratio (LDR) policy; credit support for the healthcare industry and one-year extension of moratorium for all CBN’s intervention facilities.

After the two-day Monetary Policy Committee (MPC) meeting, all the members unanimously voted to keep other parameters unchanged. Consequently, 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 ratio and the CRR policy which sterilise 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 would result in unreining input in the rising trend in inflation and that it would support reserves creation. Nigeria’s inflation rate rose to 12.20 percent in  February  2020 from 12.13 percent recorded in January 2020.

However, Emefiele said tightening would reduce money supply and limit the capacity of deposit money banks to create credit, thus resulting in increasing the cost of credit with adverse impact on output growth. Tightening will also reduce aggregate demand as a fall in aggregate consumption will result in output compression, whereas at this time policy emphasis should be on stimulating aggregate supply and demand both of which have already been weakened by COVID-19.

“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.

With respect to 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 loosening given the fact that it would exacerbate an already worsening inflationary condition resulting in massive pressure on reserves and exchange rate.

Bismarck Rewane, CEO, Financial Derivatives Company, said the MPC rate is an anchor rate which 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 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 would 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 NASS to avoid the tendency to increasing the benchmark price of oil in the federal budget as this usually results 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.
However, Lanre Buluro, director and head of sales, Chapel Hill Denham, said the decision to hold the MPR was 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, CIBN, 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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