CBN Governor, Sanusi Lamido Sanusi
By James Emejo
Central Bank of Nigeria (CBN) Monday raised the Monetary Policy Rate (MPR) by 50 basis points to 9.25 per cent from its current level of 8.75 per cent.
Although the hike is unlikely to affect banks' capacity to lend, it would, however, increase the cost of borrowing from commercial banks.
CBN Governor, Mallam Sanusi Lamido Sanusi, who unveiled this in Communiqué No. 78 of the Monetary Policy Committee (MPC) meeting in Abuja, said the decision to further tighten the monetary policy was borne out of concerns over the volatility in the international financial market.
He also hinged the apex bank’s action on what he called the continuing expansionary fiscal stance and high component of recurrent expenditure and the “deepening” debt crisis in the Eurozone.
Sanusi said the Eurozone’s financial challenges and other intervening problems in the sector had led to fears of a second recession as well as liquidity surge expected from the intervention of Asset Management Corporation of Nigeria (AMCON) in the recapitalisation of the remaining five rescued banks.
He said the resolve to raise the MPR was supported by a majority of eight to three members.
According to him, while seven members voted for 50-basis-point increase in MPR from 8.75 to 9.25 per cent, only one member voted for a 100-basis-point raise in interest rate and three members favoured the retention of the MPR at the current rate.
He said a unanimous decision was taken to maintain the current symmetric corridor of +/-200 basis points around the MPR and also retain the current CRR of 4.0 per cent.
Sanusi said: “The announcement of a target of one per cent annual reduction in government recurrent spending when viewed in the context of the anticipated injections associated with the implementation of the new national minimum wage, suggests that the fiscal retrenchment is likely to be drawn out.
“In addition, there is the weight of structural factors such as the announced hike in electricity tariffs and the expected removal of petroleum subsidy.”
He also said: “The AMCON injection of N3.0 trillion is going to add to liquidity surge with the attendant adverse impact on prices" thus, the "need for further tightening of monetary policy”.
He said although the committee considered the fact that high lending rates increase the cost of finance to small and medium enterprises (SMEs) with its resultant adverse effect for growth and job creation, it nevertheless settled for tightening in the short term.
Commenting on the low deposit rates and its impact on savings, the CBN governor said: “We are dealing with a number of issues; the savings rates have been a source of concern to us but you must remember that up to this point, we have a central bank guarantee on the inter-bank market. Now, what that means is that frankly for most of the institutions, they are able to access inter-bank funds that are very short term when they need liquidity and still able to negotiate rates down because they have this guarantee that helps them to get liquidity.
“What I think is likely to happen is that from December 31, when the guarantee is removed, and banks begin to pose limits on exposure to counter-parties, because they are now taking counter party risk without great enhancement, you are going to see a lot of pressure for the banks to offer higher rates of interest on deposit liabilities, including savings.”
He said he expected deposit rates to however, soar when the CBN guarantee ends and when banks have to depend more on third party deposits.
Sanusi said even though there had been four consecutive increases in MPR, credit to private sector had also improved.
“Broad money (M2) grew by 8.55 per cent in the eight months to August 2011, which annualised to a growth rate of 12.82 per cent. Aggregate domestic credit (net) grew by 14.72 per cent in August 2011 when compared with the level in December 2010," he said.
However, the CBN governor said the committee also noted that the current international developments posed substantial economic uncertainties, clouding the outlook for global growth and inflation.
He said there was a general expectation that there would be a slowdown in almost all advanced economies in the near future, raising fears of a second recession.
On the domestic front, Sanusi said the MPC observed that inflationary pressures faced by the domestic economy had slightly moderated following the series of monetary policy tightening measures adopted by the apex bank, complemented by a favourable harvest.
But he added that although output growth remained robust, the current security challenges in the country could undermine investors' confidence and output in no distant time.