With an eye on output growth, the Central Bank of Nigeria (CBN) on Thursday slashed the benchmark interest rate by 100 basis points to 12.5 percent from 13.5 percent, the first easing since March 2019 and the largest since 2015.
The move is to spur lending to the economy which faces imminent recession on twin pressures of COVID-19 pandemic and low oil prices.
But the CBN retained the Cash Reserve Ratio (CRR), which it recently adjusted upwards in March, at 27.5 percent, left the Liquidity Ratio (LR) at 30 percent, and retained the asymmetric corridor around the MPR at +200/-500 basis points.
Godwin Emefiele, CBN governor, announced this during a virtual briefing after the two-day Monetary Policy Committee (MPC) meeting.
Emefiele said in taking the decision, the committee considered that CRR was recently adjusted upwards as a means of tightening monetary policy. Also following that adjustment, and in response to COVID-19 pandemic, the CBN reduced the rates associated with all its interventions from 9 percent to 5 percent.
Though the CBN is concerned about the persisting uptick in inflation for the eighth consecutive month, with headline inflation rising to 12.34 percent in April 2020 from 12.26 percent in March, it is also worried that raising MPR at this stage will be counter-intuitive and will result in upward pressure, he said.
“In view of the foregoing, the committee decided with a unanimous vote to reduce MPR to 12.5 percent, and to hold all other policy parameters constant,” Emefiele said.
Analysts say the cut in the benchmark interest rate will have impact on banks’ lending and deposits as banks will have to reduce their lending rates to clients.
Razia Khan, managing director, chief economist, Africa and Middle East, Global Research, Standard Chartered Bank, said it’s not immediately clear how much a 100 bps policy rate cut on its own will achieve, and other policy measures will continue to be relied on to channel support to identified strategic sectors.
The CBN appeared relatively upbeat that the economy could return to growth or even avert a recession by the third quarter of 2020 on the back of what Emefiele called “far-reaching fiscal and monetary measures to combat COVID-19 impact”, as well as continued gains in the oil price.
“Given the severe global downturn, however, we are less optimistic, and see an average Brent crude price of USD35/bbl this year. Nigeria’s compliance with its OPEC++ quota, with agreed production cuts in place until April 2022, will also have implications for oil sector growth, despite still strong y/y production growth in Q1, 2020. We do not see this persisting,” Khan said.
Ayodeji Ebo, managing director, Afrinvest Securities Limited, said the impact of the rate cut would be on the decline in the Standing Deposit Facility and Standing Lending Facility which are tied around the Monetary Policy Rate (MPR).
He said the action of the MPC was more of a signalling effect. The MPR has proven to be ineffective in the past few years as CBN has applied other policy options to adjust interest rates.
“We do not expect any adjustment or reaction in the fixed income market as rates are already at rock bottom and will be driven more on liquidity. Also, for lending rate, this has always been sticky downwards, hence will not result to a reduction in lending rates,” Ebo said.
All the financial analysts polled by BusinessDay said the decision by the CBN to reduce MPR down to 12.5 percent was a welcome development.
“Good decision, but reduction of the CRR will have more impact in stimulating the economy,” said Ayodele Akinwunmi, relationship manager, investment banking, FSDH Merchant Bank Limited.
Omotola Abimbola, a macro and fixed income analyst at Lagos-based Chapel Hill Denham, said the MPR cut was surprising, but not totally out of line since the CBN has been easing monetary policy since last year.
“The effectiveness of the MPR in stimulating the economy is arguable, particularly when you compare it to the LDR policy and the decision to restrict non-bank local investors from the OMO market. Both have been a lot more effective in boosting loan growth and suppressing interest rates. So, the rate cut today is more symbolic,” Abimbola said.
Uche Uwaleke, professor of finance and capital markets and chair, Banking and Finance Department, Nasarawa State University, Keffi, said the MPC decision to cut the benchmark interest rate by 100 basis points down to 12.5 percent is a demonstration of the CBN’s sensitivity to the need to stimulate the economy and enable it withstand the negative impact of COVID-19 as well as the drop in oil revenue.
“Having signalled intention to adopt an accommodative stance in favour of growth, the CBN should put in place measures to ensure that it translates to lower lending rates by the banks to the real sectors of the economy,” he said.
Muda Yusuf, director-general, Lagos Chamber of Commerce and Industry (LCCI), said he was a bit surprised, adding that though the cut in MPR may seem symbolic, the CRR was of more concern in the system than the MPR.
“What the outlook will be to a large extent will be on how we manage the FX market. We still don’t have clarity on how the CBN wants to go about this. Already, we are seeing a liquidity challenge in the FX market and this will have an effect on investors ’confidence,” Yusuf said.
“We need to see how we can handle issues around our trade policy and issues around the interstate lockdown which has affected domestic economic performance greatly because already, we have an issue with the external sector and the domestic economy is not able to function properly because of all these restrictions around the country. I appreciate the optimism from the CBN, but a lot will depend on a lot of factors beyond the MPR action,” he said.
ONYINYE NWACHUWU (Abuja), HOPE MOSES-ASHIKE & BUNMI BAILEY (Lagos)
