BUSINESS13 CBN: Why we can’t cut Four jostle for AuditorGeneral interest rate now of the Experts fault MPC’s decision Federation
The Central Bank of Nigeria (CBN) has refused to cut interest rate despite calls for it by the Minister of Finanace Mrs. Kemi Adeosun and other stakeholders.
Rising from their 252 meeting, yeserday, 10 out of the 12 members of the Monetary Policy Committee (MPC) voted to retain tight monetary control at the present state.
Speaking on the outcome, in Abuja, CBN governor, Godwin Emefiele, said: “The committee assessed the relevant risks and concluded that the economy continues to face elevated risks on both price and output fronts… Committee elected to retain the current stance of policy.
“Conscious of the need to allow this and other measures like the foreign exchange market reforms to work through fully, the committee decided to retain all the monetary policy instruments at their current levels.
“All 10 MPC members voted to: retain the MPR at 14.00 per cent, retain the CRR at 22.5 per cent, retain the Liquidity Ratio at 30.00 per cent and retain the Asymmetric Window at +200 and -500 basis points around the MPR.
“If you lower interest rate, you will make it possible for the fiscal authorities to borrow at lower rates. But if you borrow at lower rate to stimulate spending and stimulate demand for goods, by providing cash to be spent without taking actions to boost manufacturing output, what happens is that you will see too much money chasing too few goods and this will worsen the inflationary condition.
“The option we adopted is that, while the fiscal is spending, we retain the rates at fairly tight situation to encourage inflow of foreign capital like we said at the last meeting. At the last meeting, I wasn’t that optimistic but I am now optimistic because between July 2016 and now, we have seen inflow of FX above $1 billion. With that manufacturers bought the dollars and imported raw materials.
“When you import raw materials, those manufacturers that said they were closing will have the opportunity to produce and employ people. When they employ people, you increase your productivity, you produce your goods and the price of goods will be moderated from the monetary stand point.
“This won’t result to inflationary condition. We are working together, but let’s work together to achieve what we want to achieve in a way that won’t hurt the economy.”
Speaking earlier on the Channels TV Sunrise Daily programme yesterday, Mrs Adeosun argued that when a country is in recession, the interest rate should be lowered to stimulate activities.
“This government is spending its way out of trouble, and that spending, much of it, is being borrowed. So if you increase the interest rate, you increase our cost of debt service,” she said.
“In an ideal world, I need lower interest rates. When you are in a recession, you cut interest rate to stimulate activity. So we would love to see the MPC consider how they can help us lower interest rates.
“I do understand what they were trying to do, which is, manage inflation. Looking at the structural nature of this inflation, it is unlikely to mainly respond to monetary policy initiatives. It’s structural inflation.”
Commenting on the development, the Director, Research and Advocacy of the Lagos Chamber of Commerce and Industry, Dr Vincent Nwani, said the decision by the MPC came as a surprise to many stakeholders, going by the fact that both the CBN governor and the finance minister who initially suggested for the rate cut are in the economic team of the federal government.
This shows that there is dichotomy between the fiscal and the momentary authorities because they are not on the same page. “We were shocked by the decision and we only going to pray that God will see us through this period.”
Rislanudeen Muhammad, the former acting managing director of the Unity Bank and CEO, Safmur Investments Limited, said: “The CBN governor was right by positing that pace of increased inflation from 17.1% in July to 17.6% in August 2016 has slowed down, now increasing but at a decreasing rate. That is, however, not enough to trade off growth for an economy in recession.
“Meanwhile, the continued attempt by MPC to attack inflation, citing negative interest rate has not impacted on either dealing with inflation or spurring growth. By ignoring positive suggestion of reducing MPR to support growth, the minister of finance clearly implies the absence of synergy as monetary and fiscal authorities seem to be thinking at cross purposes.
“I feel this is wrong decision and not in tune with fiscal objective of stimulating the economy and pulling it out of stagflation and recession. For now, foreign portfolio investors and other top end investors will continue to benefit from lucrative high yielding investments in Nigerian fixed income market, especially bonds and treasury bills whose rates are tied to monetary policy rates while local borrowings by government to fund the fiscal deficit will remain expensive.”
Mr Moses Azege, an Abujabased financial analyst, said: “The MPC’s argument for raising the interest rate last time was to stem negative interest rate and, thus, encourage more foreign investment in financial instruments.
“Currently, with inflation still rising, the least they (MPC) could do was to protect the FX rate. When the much expected dollars start to boost the naira and we start to see less demand for FX the inflationary pressure will ease and they might subsequently reduce interest rate.” FLIGHT
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