CBN Reduces Interest Rate to 13.5%

The Central Bank of Nigeria (CBN), on Tuesday announced a slight reduction in its Monetary Policy Rate (MPR) from 14per cent  it was pegged since 2016 to 13.5per cent.

The CBN Governor, Mr Godwin Emefiele, said six out of 11 members of the MPC voted to reduce the MPR by 50 basis points to boost lending to manufacturing, agricultural and Small and Medium Enterprises (SMEs).

He said: “In its consideration of the best monetary option, the committee noted the need for all agencies of government to work harder not only in consolidating the growth so far achieved, but also in ensuring that appropriate policies are put in place and implemented to create jobs on a mass scale as well as diversify the economy in a proper direction. 

“Two members voted to reduce the monetary policy rate by 0.25per cent, 25 basis point, while one member voted to reduce it by 100 basis point which is 1per cent. Two members however voted to hold MPR at its current level. 10 members voted to hold all other parameters constant while a member voted to reduce the cash reserve ratio by 100 basis point from 22.5 to 21.5.

“In summary the MPC voted to adjust the MPR by 50 basis point from 14 to 13.5per cent, retain the asemetric corridor of +200 and -500 basis point around the MPR, retain the CRR at 22.5per cent and retain the liquidity ratio at 30per cent.

“Yes. There is a relationship between lending to the SMEs, not just SMEs, to the agricultural and manufacturing sectors of the economy and our decision today justifies that.

“The reason being that if you consider the fact that for instance in January 2017, inflation had attained the level of 8.72per cent by October 2017. As a result of the pressure in the global market, reserves had dropped to about $23 billion. 

“By that same month, even what was being accredited into Central Bank had dropped to about just $500 million from as high as about $3 billion sometimes in August 2013, 2014. If you also recall that sometime in February 2017, exchange rate as a result of the pressures had accelerated to as high as N525 to the dollar, but that is if you compare those numbers with where we are today, inflation at 11.3per cent, reserves at close to $45 billion, exchange rate converging in all the market. We feel this trend should continue. 

“We will continue to do what we have done in the past, keeping inflation at moderated level”, he explained.

On whether the decision would not mount pressure on the naira, the CBN Governor said. 

“My answer is capital NO. I just told you that 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”  he assured.

On the projection of 2.3per cent growth, the Governor answered thus: “We feel that having consistently being in positive trajectory for growth in the last five to six quarters, and closing at an average year GDP of about 1.81per cent, I think that if you look at the trend from the year 2017 into 2018,  you will naturally expect that if we push hard, even harder than we have done in the past that we should be able to push growth between 2.7 and 3 per cent”, he stated. 

Meanwhile experts have reacted to CBN’s decision to reduce the MPR, describing it as a proof that it was desirous of relaxing monetary policy to support economic growth. 

For a Professor of Capital Markets, Uche Uwaleke, the CBN’s decision was soothing.

He said: “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 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,”  he said. 

For his part, an analyst with FXTM, an online financial trading company, Lukman Otunuga, predicted more rate cuts by the Central Bank of Nigeria (CBN) as a corrolary to the reduction in its benchmark interest rate, Monetary Policy Rate (MPR).,

He noted that investors were caught completely off-guard, Tuesday, after the apex bank unexpectedly cut the MPR for the first time in more than two years in an effort to support growth.

The apex bank resolved to reduce the MPR, otherwise known as interest rate, by 50 basis points to 13.5 per cent from 14 per cent as inflationary pressures eased and macroeconomic conditions stabilised during the first quarter of 2019. 

In a reseach note yesterday, Otunuga said:

“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. However, a “patient” Federal Reserve coupled with rising speculation of a possible rate cut in the United States has offered the CBN some breathing room to take action.”

Before yesterday’s cut Otunuga had in a story published in the Daily Sun last week, had urged the CBN to cut the MPR to boost the local economy. 

His words: “I expect CBN to leave its monetary policy rate unchanged in its coming MPC meeting. I would like to see the signs of inflation moderating. I mean inflation coming down to between 6 per cent and 9 per cent level. That band should be able to offer a window for CBN to cut interest rate in an effort to boost domestic economy. The problem with them cutting rates last year was the fact that Federal Reserve wanted to hike their interest rates. So naturally, this would widen the interest rate differentials between the naira and the dollar. Of course, that would impact the naira structure.”