The Central Bank of Nigeria (CBN), on Tuesday lowered the Monetary Policy Rate (MPR) by 50 basis points to 13.5 percent, citing need to stimulate growth coupled with the fact that monetary policy had driven macroeconomic gains to a point where softening is now necessary.
It however, left the Cash Reserve Ratio (CRR) unchanged at 22.5 percent, Liquidity Ratio at 30 percent and Asymmetric corridor around the MPR at +200 and -500 basis points.
Announcing the new policy, CBN governor Godwin Emefiele said the decision to tweak the benchmark rate which it had held steady at 14 percent for close to three years now was a signal that monetary policy needed to begin to consolidate growth – but does not in any way indicate a commencement of a rate cutting cycle.
He said the apex bank was happy with macroeconomic gains and stability achieved so far with the monetary tightening stance since 2016 and now needed to push more to consolidate on growth outcomes.
“We are softening gradually but will keep an eye on the inflation and exchange rate,” Emefiele said while briefing journalists on the outcomes of the two days Monetary Policy Committee meeting.
Emefiele noted that having achieved a relatively stable exchange rate and price stability, it was imperative that monetary policy should explore the next steps necessary for enhancing growth, reducing unemployment and diversifying the base of the economy.
In taking the decision, the committee faced the policy options of either retaining current monetary policy stance or a slight loosening of the policy rate, backed by the substantial stability of the major macroeconomic indicators.
But the Committee was convinced that given the relative stability in the key macroeconomic variables, there was need to signal a new direction that is pro-growth.
Emefiele’s words, “In its arguments, the Committee was convinced that doing this would further uphold CBN’s commitment to promoting strong growth by way of encouraging credit flow to the productive sectors of the economy.
“The MPC felt that signalling through loosening by a marginal reduction would serve to manage the sentiments in the capital markets owing to the wider spread in yields in the EMDEs, relative to the advanced economies. Moreover, the real interest rate in the country would still remain positive.”
Besides, the committee further observed that per capita income growth is very negligible, while aggregate demand remains weak and also urged for a rebasing or the economy which had been long due.
“Aggregate output also remains below the potential output level, implying sufficient headroom for non-inflationary growth. This new direction has, therefore, become imperative against the backdrop of the aftermath of the general national elections and strong inflow of foreign direct and portfolio investments into the economy,” Emefiele stressed.
The Committee further urged the speedy passage of the other aspects of the Petroleum Industry Bill (PIB) to fast track the development of the value chain in the sector and create employment.
Emefiele indicated CBN’s comfort with the passage of the National Minimum Wage Bill, but called for its speedy implementation in order to boost domestic aggregate demand.
The CBN is further worried about the encumbrances and constraints imposed on fiscal policy and the associated vulnerabilities as it has consistently failed to mobilise sufficient revenues to support development as enunciated in the ERGP, leaving room for continued debt financing, not previously envisaged.
“Against this backdrop, it is imperative for monetary policy to provide the much needed leverage to support output growth and employment generation in the country,” the governor, again argued.
The CBN also urged the Government to expedite action in settling all outstanding contractor-related arrears so as to improve the huge NPLs position of banks and stabilise the banking system.
Analysts saw the announcent as positive but doubted whether this could make much desired impact on stimulating lending.
“This is a welcome development and the timing is interesting,” Bismarck Rewane, CEO at the Financial Derivatives Company reacted immediately after the Emefiele’s pronouncement.
“It’s good that monetary policy is now beginning to.support growth and not just procyclical as we have seen in the past,” he added.
Onyinye Nwachukwu, Abuja
