In a bid to salvage Nigeria’s economy from the negative impact of COVID-19, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) trimmed its benchmark lending rate on Tuesday by 100 basis points to 11.5 percent.
According to the Central Bank Governor, Godwin Emefiele 60 percent of the 10 members of the monetary policy committee voted to lower the rate to 11.5 percent from 12.5 perecnt, the second cut this year.
Meanwhile, the asymmetric corridor, which is the cost at which lenders borrow was also adjusted by the committee to 100 basis points as they reduced deposits to 700 basis points. The decision according to the MPC is to push deposit money banks to increase lending.
While the rate cut by MPC is aimed at stimulating growth in Africa’s largest economy, a 10 analyst poll by BusinessDay shows it will have five implications on the following key variables
Unlikely to spur GDP growth
Likely to enter its second recession in the third quarter of 2020, analysts believe the rate cut by MPC is less likely to boost Nigeria’s GDP growth rate which has been crawling behind its population growth rate since 2015.
“The reduction in interest-rate is unlikely to spur recovery amid pressure on the external account and galloping inflation,” analysts at United Capital said.
Badly hit by the double challenge of COVID-19 and lower crude price, Nigeria’s first contraction in three years at -6.1 percent in the second quarter of 2020 puts the largest economy in Africa in a stagflated state.
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The condition which is described by slow, declining or contracting economic growth and relatively high unemployment, or economic stagnation, which is at the same time accompanied by rising prices (i.e. inflation) tips Nigeria into top six most miserable countries globally.
Positive for banks
The recent decision by the MPC is positive for banks as return on their deposits is expected to decline, this is likely to feed into lower cost of funds for the lenders, particularly for those with a huge customer base.
While the rate cut will help the banks’ net interest income analysts believe the banks with daily liquidity shortfalls will be able to ride on the rate cute to access funds cheaply at the CBN’s lending windows.
Negative for exchange rate
With the rate cut, the return on investment in real terms widened further as inflation reached 29 month-high of 13.22 percent in August. According to analysts, a wider negative return will discourage foreign investors and hence, reduce dollar inflow.
For the first time in more than four years, foreign investors avoided staking their monies in Nigerian bonds, after a move to ration dollars heightened investors’ fear in the economy. No foreigner invested in Nigerian bonds in the second quarter of 2020.
“A wider negative real interest is negative for foreign capital flows and the FX rate as foreign investors are likely to transfer their funds to markets with attractive risk-return profile,” a Lagos-based market analyst said.
Meanwhile, Nigeria’s recent dollar shortage which pushed the CBN to devalue the naira twice this year was fueled by the drop in the production and price of oil and consequently led to the steep drop in the gross domestic product in at least 10 years.
Lower rates on investments/savings deposits
With the rate cut, the CBN’s recently adjusted saving rate, set at 10 percent of MPR, will be revised from 1.25 percent per annum to 1.15 percent.
“Savers who have to earn below inflation rate return on their savings would see the value of their money eroded. Thus, by the time repayments are made, the purchasing power of the saved money would be lower which implies lower income, lower demand and lower output,” Ayorinde Akinloye, a Research Analyst at CSL Stockbrokers Limited said.
Also, the rates on Government fixed income instrument which has already hit their low record levels are will be heightened as Bond yields are likely to reduce further.
Positive for equities market
With extra pressure on money and bond market yields, analysts expect the rate cut to further spur domestic investors’ participation.
“Also, listed companies’ ability to access cheap capital at the fixed income market should also help lessen pressures on their bottom-line over the coming years,” analysts any United Capital explained.
According to Oscar Onyema, CEO of the Nigerian Stock Exchange (NSE), domestic investors have accounted for almost 60 percent of the trading activities in 2020 compared to the average of 51 percent in the last four years.
“The low yield environment has positioned the equities market as a credible investment option for domestic institutional and retail investors,” Onyema said.
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