By Charles Abuede
- MPR cut 100 basis points from 12.5% to 11.5%
- Adjusts asymmetric corridor from +200/-500 to +100/-700 around MPR;
- Retains CRR at 27.5%; Liquidity Ratio at 30%
The 275th meeting of the CBN’s Monetary Policy Committee (MPC), which held on Tuesday in Abuja, amid the lingering uncertainties associated with the COVID-19 pandemic and the downturn in crude oil prices, saw the committee adjust the policy rate downward by 100 basis points to 11.50 per cent from 12.50 per cent, in a drive to stimulate the growth of credit to the private sector of the economy.
Similarly, the committee further adjusted the asymmetric corridor to +100/-700 basis points around the MPR, retained the cash reserve ratio (CRR) at 27.5 per cent, and also kept the liquidity ratio (LR) unchanged at 30 per cent.
But what does the decision to ease the policy stance mean for Nigerians, the economy and businesses?
Several economists have opined that slashing the policy rate would help to revive an already muted growth, but there is still some concern that it could increase prices or lead to capital flight, which will in turn, add further pressure on the naira.
Also, the option to lower the MPR from 12.5 per cent appears to immediately be confronted by an inflation rate standing at 13.22 per cent, with downside risks to inflation now heightened following the increase in the pump price of fuel.
Besides, the downward review of the MPR could further drag real returns into the negative territory with the potential of exerting pressure on the foreign exchange market with the possible negative consequence on the value of the local currency, the naira.
The report from the MPC meeting say that the MPC states that it expects that a downward adjustment in the policy rate is necessary to further put pressure on deposit money banks (DMBs) in order to lower cost of credit and aid growth in the economy.
However, the committee also expressed that the likely action aimed at addressing the rise in domestic prices would have been to tighten the stance of policy, as this will not only moderate the upward pressure on prices but will also attract fresh capital into the economy and improve the level of the external reserves.
On the other hand, the recent increase in the pump price of fuel and the planned unification of the exchange rates represents downside risk to inflation. But the reduction in MPR even by 100 basis points from the 12.50 per cent will result in negative real interest rate which is inimical to capital inflows from foreign investors.
Also, cutting rates could trigger more credit and thus inflation and also put more pressure on the naira. The decision taken on the MPR will not impact the credit space, especially the SME space, because few SMEs have traditional banking loans. And investors, who have been on the lookout for surprises do follow the policy rates to allow them mark fixed income securities to market.
What are the policy committee’s considerations?
Godwin Emefiele, governor of the Central Bank of Nigeria, who chairs the MPC meeting, in his post-meeting briefing, disclosed that the committees’ decision to adjust the MPR came after careful considerations of key monetary areas and major headwinds that are exerting downward pressure on output growth and upward pressure on domestic prices.
“The key factors considered by the MPC as likely to exert upward pressure on domestic prices in the near term include: the prevalence of security challenges in the country; adverse weather conditions causing flooding in some farming regions; the increase in petroleum pump price; deregulation in electricity tariff; low crude oil price; and exchange rate adjustment,” Emefiele disclosed.