Financial experts laud benchmark rate cut

Wed, Mar 27, 2019 | By publisher


Business, Featured

Experts express hope that the cut in interest rate will attract more investment into the country and also boost the nation’s economy

By Emeka Ejere

SOME financial experts have commended the decision of the Monetary Policy Committee, MPC, of the Central Bank of Nigeria, CBN, over the reduction in the benchmark lending rate, describing it as a signal to a new economic direction for the country.

The MPC had at the end of its 266rd meeting on Monday, March 25 and Tuesday, March 26, cut down the benchmark lending rate by 50 basis points from 14 percent to 13.5 percent to further promote economic growth.

The experts in separate telephone interviews said it was the right thing to do now that the election was over. This is the first time the rate has been altered since July 2016.

The MPC, however, left all other key parameters unchanged – Cash Reserve Requirement, CRR, remained at 22.5 per cent, while the liquidity ratio was kept at 30 percent.

Boniface Chizea, an economist and chief executive officer of BIC Consultancy Services, said the reduction in the Monetary Policy Rate, MPR, from 14 percent to 13.5 percent would boost economic activities and increase productivity in the country.

According to Chizea, the MPC’s decision was a wise one because the inflation rate at 11.31 per cent was dropping. He said apart from the decline in the inflation rate, the country had recorded positive growth in the gross domestic product, GDP, standing at 1.92 percent in 2018 with a forecast of three per cent increase as well as accumulated foreign exchange reserves and oil price improvement.

His words: “So, there is every reason for the benchmark rate to come down. Even, the inflow of funds coming from overseas to the country is on the increase as investors are coming in.

“Everything is okay, so no reasons not to reduce the rate,” he said. On the effect of the reduced benchmark rate on banks’ interest rates and with the declining inflation rate, Chizea said that might not show immediately.

“What is most important is that psychologically, the central bank has spoken and they have told the whole world that things are getting better,” he said. The former banker said that the reduced interest would significantly make borrowing cheaper.

“It means that those economic agents on the margin that have problems with the 14 per cent should now be able to borrow. If that happens, they may now give a boost to economic activities in the country,” he added.

On his part, Johnson Chukwu, the managing director of Cowry Assets Ltd., said the reduction in benchmark rate was an indication that the monetary policy committee had moved from its contractionary stance to accommodative induced one.

Chukwu noted that the monetary authority’s decision emphasised an economic growth as against price stability. He said, “If the inflation rate is 11.31 percent and the monetary policy rate is 13.35 percent, the reality is that we are still going to enjoy what is called positive yield income because the interest rate is higher than the inflation rate.

“The Nigerian environment is particular in its own way in the sense that the monetary policy will be a guide in showing the direction of government orientation and may not necessarily be the key determinant of interest rate in the environment.

“I don’t expect that the lending rate to immediately trend downward.

“There are certain factors that lenders take into cognisance in determining the lending rates.

“However, the fact is that it will force down yields on some of the debt instrument because it shows that the central bank is ready to have an accommodative policy stance.

Also reacting to the development, Teslim Shitta-Bey, an economist and former head of corporate banking at the defunct Citi Express Bank, described MPR reduction as a sign of hope for industrialisation and job creation.

Shitta-Bey, who is a strong advocate of single-digit interest rate due to high level of unemployment in the country, said the MPC should continue with downward review of the lending rate, pointing out that it is not only an incentive to borrowing but also reduces the risk associated with lending.

“The higher the interest rate, the higher the possibility of default,” he noted.

– Mar. 27, 2019 @ 17:21 GMT |

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