To Spur Economic Growth, CBN Cuts Interest Rate to 13.5%

After keeping the benchmark Monetary Policy Rate (MPR) unchanged for 33 months, the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) caught analysts and investors off-guard yesterday as it announced a reduction in the MPR from 14 per cent to 13.5 per cent.

The CBN hinged its decision on the need to boost economic growth.

The MPR is the baseline for interest rate in the economy.

CBN Governor, Mr. Godwin Emefiele, announced the MPC decision at the end of a two-day meeting in Abuja.

The committee, however, retained the Cash Reserve Ratio (CRR) at 22.5 per cent and Liquidity Ratio at 30 per cent.

Emefiele pointed out that the rate cut does not necessarily indicate an end to the monetary tightening cycle.

Emefiele said banks would be expected to adjust to the loosening in MPR so that its positive impact could be felt by customers.

He also said the reduction in MPR had a “reasonable” correlation to lending to the real sectors of the economy.

The CBN governor said: “Now, having been on this path, particularly the MPR at 14 per cent since July 2016, and with the relative stability we have seen in the macroeconomic variables over the last two and a half years, we just think that this should be the next phase where we

keeping our eyes on all other parameters, let's see whether we can signal a direction from the monetary policy, in the direction of supporting and really accelerating growth in the country.

“Accelerating growth effectively means that we have to push harder to consolidate GDP, we need to push harder to make sure we create jobs. Doing this will naturally mean that we are softening gradually. But I repeat and I shouldn't be misunderstood, that we will continue to do what we are doing, what we have done in the past keeping inflation at moderated levels, and exchange rate stable. We will continue to do so. I think we are moving in the right direction.”

Emefiele said the slight interest rate reduction was “Meant to signal and what that meant is that, all factors held constant... what we were doing that macroeconomic remains strong, we need to signal that there is a need for us to slightly, not change course, move course a little further because while you are talking about a low inflation rate regime, you are looking at a stable exchange rate regime, strong reserves management ... naturally you will also expect that growth should grow stronger and to do so means that we need to begin to look at money supply, liquidity, interest rate and issues like that to see that we push effectively towards growth.”

Meanwhile, the CBN also called for 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.

The committee also welcomed the passage of the National Minimum Wage Bill by the National Assembly and called for its speedy implementation in order to boost domestic aggregate demand.

Nonetheless, in arriving at the decision to reduce interest rate, Emefiele who read the committee’s communique at the end of the meeting, noted that the MPC decided by a vote of six out of eleven members to reduce MPR by 50 basis points.

The committee, among other things urged the federal government to strengthen its current revenue mobilisation efforts as well as explore additional sources of revenue in order to improve fiscal buffers.

Specifically, the CBN urged the federal government to sustain its implementation of the ERGP, while ensuring that growth is all inclusive and further reiterated the need to concentrate effort on addressing the problem of weak power infrastructure, as well as support domestic manufacturing.

The committee also called on all relevant institutions of the government to address the menace of smuggling and dumping of goods into Nigeria; and encouraged the apex bank to continue to explore available scenarios to deal with the activities of economic and policy saboteurs, including those involved in dumping and smuggling, in a bid to accelerate domestic production of goods in the country.

Analysts’ Reactions

Reacting to the rate cut by the CBN, a professor of Finance and Capital Market at the Nasarawa State University, Keffi, Prof. Uche Uwaleke, said the move was the right response to inflation which had been on a decline in recent months.

He told THISDAY: “The reduction in MPR by 50 basis points signals the CBN's desire to relax monetary policy to support economic growth. Obviously, it is a right response to the declining inflationary pressure and the relative stability in exchange rate which have prevailed for quite some time.

“Moreover, on the external front, crude oil price has stabilised around 65 dollars per barrel while the US interest rate normalisation has slowed down. All these must have combined to influence the MPC decision which is expected to increase the flow of credit to the real sector.”

According to him: “The reduced MPR will also be positive for the capital market as some of the increased liquidity that will ensue will flow into the equities market.

Also, it will be cheaper

for the government to issue bonds, given that part of this year's budget deficit will be financed through domestic borrowing.”

But the Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, said the decision by the MPC was for “signalling purpose, so it depends on whether the economic agents would react to the signal.

“But I think this should have been done almost a year ago, as a stimulant. But we are where we are and they say it is better late than never.”

To FXTM’s Research Analyst, Lukman Otunuga, the move by the MPC would support growth.

“The central bank reduced interest rates from 14 per cent to 13.5 per cent as inflationary pressure eased and macroeconomic conditions stabilised during the first quarter of 2019.

“Today’s move by the CBN may open the doors to further rate cuts in the future, especially if macroeconomic conditions continue to improve and inflation cools further,” he

added.

On her part, the Managing Director/Chief Economist, Africa and Middle East, Standard Chartered Bank, Razia Khan, said the MPC decision, “raises important questions about the government’s broader reform intent. First, the MPR cut comes following Senate approval of a sizeable minimum wage increase. Second, what does it suggest about the likelihood of an imminent VAT hike or fuel price deregulation? Both are pressing, much-needed reforms - but the CBN’s rate cut today appears to suggest that these reforms, which may both exert upward pressure on the price level in the short-term, may not necessarily be imminent. This would be disappointing, especially for investors hoping for stronger reform impetus post-election.

“Third, with the CRR – a much more important determinant of the policy stance of the CBN - still unchanged, it is not clear that a modest policy rate cut on its own will do very much to boost bank lending.”