CBN cuts interest rate to 13.5%, seeks GDP rebasing

The Monetary Policy Committee of the Central Bank of Nigeria on Tuesday reduced the Monetary Policy Rate, also known as the benchmark or main interest rate, from 14 per cent to 13.5 per cent.

The MPR, which is used to determine bank lending rates and the cost of credit for borrowers, had been held at a record high of 14 per cent since July 2016 when it was hiked by 200 basis points from 12 per cent.

The CBN Governor, Mr Godwin Emefiele, who announced the decision of the MPC at the end of a two-day meeting in Abuja, explained that six members out of 11 who attended the meeting agreed to reduce the current monetary policy stance.

He said while the MPR was reduced to 13.5 per cent, the committee decided to retain the Cash Reserves Ratio at 22.5 per cent, the liquidity ratio at 30 per cent; and the asymmetric window at +200 and -500 basis points around the MPR.

He said, “The MPC decided by a vote of six out of 11 members to reduce the monetary policy rate by 50 basis points, that is 0.5 per cent. Two members voted to reduce the rate by 0.25 per cent, while one member voted to reduce it by one per cent. Two members, however, voted to hold the MPR at its current level.”

Emefiele said the decision to reduce the rate was taken in the overall interest of the economy, as there was a need to have a refocus on monetary tightening.

This, he stated, would help to increase the level of credit from the banking sector to businesses.

“The MPC noted the positive moderate outlook for growth and the risk in the horizon. The committee also noted that having achieved a relatively stable exchange rate with price stability, it is imperative that the monetary policy should explore the next steps necessary for enhancing growth, reducing unemployment and diversifying the base of the Nigerian economy,” the governor said.

He said the new direction had become imperative against the backdrop of the aftermath of the general national elections and strong inflow of foreign direct and portfolio investment into the economy.

Emefiele said, “The committee felt that given the relative stability in the key macroeconomic variables, there is a need to signal a new direction and in which case we are talking about being pro-growth.

“In its argument, the committee was convinced that doing this will further uphold the bank’s commitment to promoting strong growth by way of encouraging credit flow to the productive sector of the economy.”

He said the MPC also felt that signalling through loosening by a marginal rate would help to manage the sentiment in the capital market owing to the wider spread in yields.

When asked if the reduction in interest rate would not result in pressure on the naira in the foreign exchange market, the governor responded, “My answer is no. We have seen stability in the market in over two and a half years and there is no need for anybody to worry; we will withstand any pressure.”

Noting that the CBN had projected a 2.3 per cent economic growth rate for 2019, Emefiele said the marginal reduction in MPR would further help to achieve the projection.

He said the committee called for the rebasing of the economy, an exercise that was last done by the National Bureau of Statistics in 2010.

Rebasing of the Gross Domestic Product means replacing the old base year used for compiling the GDP with a new, more recent, base year for computing the constant price estimates.

As relative prices and the structure of the economy change over time, it is necessary to update the base year frequently.

Emefiele said, “The improved outlook was attributable to the continued stability in the foreign exchange market, various interventions by the bank in the real sector and the effective implementation of the Economic Recovery and Growth Plan by the Federal Government.

“Furthermore, on the current level of national output, the MPC noted the need to rebase GDP, an exercise which was last carried out in 2010.”

On the Petroleum Industry Bill, he said that the committee called for the speedy passage of the other aspect of the bill to fast track the development of the value chain in the oil sector and create employment.

On the issue of minimum wage, the governor said while the committee welcomed the passage of the national minimum wage bill by the National Assembly, there was a need for its speedy implementation in order to boost aggregate demand.

He stressed the need for the government to settle the debts owed to contractors in order to reduce the level of non-performing loans in the banking sector.

Financial and economic experts, who spoke with our correspondents in separate interviews, described the reduction in the key interest rate as a step in the right direction but said it was not enough to boost the economy.

The Managing Director of Financial Derivatives Company Limited, Mr Bismarck Rewane, said, “It is a positive move at this time but it needs to be complemented with other measures. So, its initial impact is not going to be significant. They should have done this a year ago, if not two years ago.

“They have to reduce the CRR because people are not going to lend because the MPR has come down. Loans and credit have become price-inelastic. The whole idea of anticipated inflation versus historical inflation has not been addressed.”

A professor of Economics at the Olabisi Onabanjo University, Ago Iwoye, Sheriffdeen Tella, described the MPR reduction as too low, saying, “It won’t have any effect because the economy is still very harsh, and it cannot bring about any significant change or engender industrial growth.”

Noting that the cost of production had remained high in the country, he said the government should explore more ways to assist businesses to increase their level of production.

“The 0.5 per cent cut in MPR cannot bring any significant relief to businesses; even when it was at 14 per cent, banks were charging 18 to 20 per cent. I expected a reduction of two per cent. The CBN is still much concerned about the inflationary trend but we cannot run away from inflation as long as the cost of production is also high.”

The Director General, West African Institute for Financial and Economic Management, Prof Akpan Ekpo, said the reduction might not have immediate impact on the bank lending rates.

He said, “Most of us have expected that (the reduction) to happen so as to stimulate growth and create jobs. I thought they would have gone further downwards.

“Other things should be put in place for the reduction to have an impact on the lending rate. For example, the CBN should continue to pursue its intervention policy in terms of ensuring that banks give loans at single-digit interest rates from several funds that it has with the banks. It should make sure that the SMEs and other industries have access to those loans.”

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