Why CBN reduced monetary policy rate to 13.5% — Emefiele

The Central Bank of Nigeria (CBN) said the decision of its monetary policy committee (MPC) to slash tits controlling lending rate in the country was to establish the foundation for the next phase of growth to consolidate on stronger macro-economic structures being built for the country’s economy.

At the end of the MPC meeting in Abuja on Tuesday, CBN governor, Godwin Emefiele, said six of the 11 members in attendance voted to reduce the lending rate , otherwise known as the monetary policy rate (MPR), from 14 per cent to 13.5 per cent.

The decision took most financial sector analysts by surprise. Before the meeting, many analysts expected the committee to retain the MPR and other monetary policy variables unchanged.

Since July 2016, the Committee had, for 13 consecutive times, maintained MPR at 14 per cent; cash reserve requirement (CRR) at 22.5 per cent and liquidity ratio at 30 per cent, with the asymmetric corridor of +200 and -500 basis points around the MPR.

The CRR is the funds kept with the CBN as a minimum deposit a commercial bank must hold as reserves, rather than lend out.

The decision to keep the policy parameters unchanged for so long was in pursuit of a tighter monetary policy to bring stability to the financial market and engender growth in the country’s economy.

‘Next phase of consolidation’

However, Mr Emefiele told reporters that having achieved sustainability in the level of stability in the macro-economic indices in the economy, there was a need to move to the next phase of consolidation of the growth.

There is a relationship between loosening the lending rates and funding the MSMEs, agriculture and the manufacturing sector of the economy.

“In January 2017, inflation was at about 8.72 per cent. By October, as a result of the pressure in the global financial market, foreign reserves dropped to about $23 billion.

“In February that year, the exchange rate of the Naira rose to about N525 to the dollar, due to the pressures in the market.

Compared with where the country is today, with inflation at 11.3 per cent; foreign reserves close to $45 billion (with prospects of this continuing); exchange rate converging in the official and parallel markets between N358 and N360 to the dollar; gross domestic product (GDP) in positive trajectory consistently for about five to six quarters, one will agree there is relative stability in the economy.

“Having seen MPR at 14 per cent since July 2016, and with relative stability in the macro-economic variables over the last two to two and a half years, the CBN believes the reduction in the lending rate should be the next phase we should begin to talk about consolidating the growth in the economy,” Mr Emefiele said.

“If one considers where Nigeria’s growth has always been (at 5 per cent), all factors remaining constant, and with macro-economic stability looking strong, we need to signal that we are slightly moving course a little further.

“While talking about low inflation rate regime; to build a stable exchange rate regime; stronger reserve management, naturally one should expect growth should be stronger. This means beginning to look at money supply, liquidity, interest rate and issues like that to see that the economy is pushed effectively towards growth,” he said.

More jobs coming

The CBN governor said with the positive indices of stability and growth in the economy, the time to talk about how to create more jobs and reduce the level of unemployment in the country for the people is now.

Mr Emefiele, who said this is the time to talk about how to diversify the country’s economic base, said in doing this, the CBN will continue to keep an eye on the stability achieved so far in the macro-economic environment.

He said the apex bank would continue to do what it has been doing to keep inflation low; exchange rate stable; reserves on the positive trajectory to sustain the level of growth in the economy to consolidate on its achievement.

To consolidate on its achievement, he said, the CBN will continue to focus on those parameters, by signalling a direction from the monetary policy, to support and accelerate growth in the economy by pushing harder to consolidate on the GDP, create jobs, and diversify the economy.

Although he said the CBN was softening gradually on its tight monetary policy stance, Mr Emefiele said the CBN would continue to do what it has been doing in the past to keep inflation at moderated level and exchange rate stable.

On CBN’s projection for the country’s economy to grow at between 2.7 and 3 per cent this year, the CBN governor said with the economy consistently on a positive growth trajectory for the last five to six quarters, closing at an average year GDP of about 1.81 per cent, it was achievable.

“If one looks at the trend between 2017 and 2018, one will naturally expect if one pushes harder than we have done in the past, we should be able to push close to 2.7 and 3 per cent growth in the economy this year,” he said.

“With the data available to the CBN, and with consistency and the right push, we are positive that we are trending towards 2.7 and 3 per cent growth rate,” he added.

Both the International Monetary Fund (IMF) and the World Bank have projected Nigeria’s economy to grow at an average rate of 1.9 and 2.0 per cent in 2019, against a projection of more than 3.0 per cent in the Nigerian Economic Recovery and Growth Plan (NERGP) document.

On reports about a possible build-up to another global financial crisis and possible on the Naira, Mr Emefiele said the CBN was not anticipating any pressures.

“We have seen stability in the market over the last two to two and a half years. There is no need for anybody to worry. We will withstand any pressure.

“We went through a similar crisis in 2015, 2016 and 2017. With the support of everybody, CBN management, and MPC members, we were able to overcome those challenges. I do not think there is any challenge this MPC cannot surmount,” he assured.

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