Why CBN retains Interest Rate at 14 % for Two Years

Godwin Emefiele, governor, CBN
Godwin Emefiele, governor, CBN

The Central Bank of Nigerian retains interest rate at 14 percent in the last two years to consolidate gains from its policy on inflation with complementary positive effects on capital flows and exchange rate stability

By Anayo Ezugwu

THE reconstituted Monetary Policy Committee, MPC, of the Central Bank of Nigeria, CBN, at the its two-day meeting which ended on Wednesday, April 4, retained the Monetary Policy Rate, MPR, at 14 percent. The interest rate has remained the same since 2016. The first meeting of the year of MPC also put the Cash Reserve Ratio, CRR, at 22.5 percent, Liquidity Ratio, LR, at 30.0 percent, and the asymmetric corridor at +200 and -500 basis points around the MPR.

The committee cited fiscal distortions associated with absence of buoyancy between Gross Domestic Product, GDP, growth and tax revenue as one of the reasons for retaining the MPR. It stated that tightening monetary policy further would strengthen the impact of monetary policy on inflation with complementary positive effects on capital flows and exchange rate stability.

Contrary to the stance of some financial experts that the MPR should be reduced to attract more investments to the country, the committee is of the view that cutting the MPR could potentially dampen the positive outlook for growth and financial stability.  The committee believes that its decision would strengthen the outlook for growth by stimulating domestic aggregate demand through reduced cost of borrowing. This may, however, lead to a rise in consumer prices, generating exchange rate pressures on the currency in the process.

The committee also believes that loosening could worsen the current account balance through increased importation. According to the MPC, key macroeconomic variables have continued to evolve in a positive direction in line with the current stance of macroeconomic policy and should be allowed more time to fully manifest.

It also observed the increasing monetisation of oil proceeds as evident in the recent growing Federation Account allocations to the three tiers of government, relative to disbursements in 2017, urging the fiscal authorities to initiate strong stabilisation programmes and freeze the growth in its aggregate expenditure and FAAC distributions in order to create savings. This is important to stabilise the economy against future oil price-related shocks, the MPC argued.

Godwin Emefiele, governor, CBN, said during a press briefing after the meeting that in reaching its decision to retain the rates, the committee appraised the potential policy options in terms of the balance of risks.

“The committee also took note of the gains made so far as a result of its earlier decisions, including the stability of the foreign exchange market, the moderation in inflation rate as well as the restoration of economic growth,” he said.

The MPC meeting is sure to boost confidence in the economy. Realnews recalls that after its last meeting in November 2017, the MPC could not form a quorum to sit in January 2018 because the Senate delayed the confirmation of the nominees by President Muhammadu Buhari to replace members of the committee who had completed their tenures and retired.

Prior to this, the MPC had retained the MPR at 14 percent since July 2016 when it was increased by 200 basis points from 12 to 14 percent, while also retaining the CRR at 22.50 percent and LR at 30 percent as well as the asymmetric window at +200 and -500 points around the MPR, citing inflationary pressure and a fragile post recession economy.

The nation’s inflation rate has, however, dropped for the 12th consecutive time to 14.33 percent, according to the National Bureau of Statistics, NBS, in February 2018. According to the statistics department of the CBN, the Purchasing Managers Index, PMI, of March 2018 stood at 56.7 index points, indicating expansion in the manufacturing sector for 12 consecutive months.

However, given the appreciable improvement in the fundamentals of the economy, financial experts argue that the economy was indeed overdue for a rate cut and that monetary policy alone is deficient to bring the needed stimulant for economic growth. The called for a blend of fiscal and monetary policies for a better economic growth and recovery.

Equally, some financial experts are not surprised by the action of the MPC as they believe that a rate cut was unlikely to occur until the rate of inflation has declined close to 12 percent.

Sheriffdeen Tella, a senior economist at the Olabisi Onabanjo University, Ogun State, said holding the MPR at 14 percent was in the right direction, considering the non passage of the 2018 budget. He said the build up to the general elections demands huge spending by politicians, adding that the CBN was careful not to allow excess liquidity in the economy to erode the gains of controlling inflation.

According to him, the CBN need to watch the political behaviour and spending of politicians between now and June before contemplating any easing on the MPR as the nation’s fiscal policy is still shrouded in uncertainties.

He thinks the CBN has not foreclosed easing the MPR, arguing that that an early passage of the budget coupled with improved key fundamentals of the economy could lead to a rate cut to stimulate the productive sector, and allow for the expansion of Small and Medium Enterprises, SMEs.

Similarly, Sewa Wusu, head of research and investment advisory at SCM Capital Limited, said that all macro-economic indicators supporting economy recovery gave the committee the leeway to hold the rates.

According to him, there was need for more policy pronouncement from the fiscal side to further support growth. He noted that inflation has witnessed reduction, though still on the high side when compared to the target threshold.

On his part, Johnson Chukwu, managing director, Cowry Assets Limited, said the outcome of the MPC meeting was not a surprise. He said the decision may be because some of the committee members were newly appointed.

Chukwu said the new committee members needed to be cautious as they settle down for the task ahead. He said there was need for them to study the trends that led to the unanimous votes on unchanged rates for almost two years. He added that going forward, they may need to review one or two variables based on the nation’s economic performance.

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