Lowering Interest Rate at Odd Times

Godwin Emefiele
CBN Governor, Mr. Godwin Emefiele

James Emejo considers the uncommon resolve by the Central Bank of Nigeria to cut the benchmark rate contrary to widespread speculations

In another major upset in recent times, the CBN again proved bookmakers wrong by tinkering with the monetary policy rate (MPR), which is the reference rate that determines the cost of fund in the economy.

Faced with an array of macroeconomic challenges particularly the rising inflation which peaked at 11.34 per cent in April, while the interest rate stood at 13.5 per cent since March 2019, and falling crude oil prices, not many analysts thought the monetary policy committee of the apex bank would risk tweaking the benchmark rate.

Rather, several forecasts had suggested the CBN might either keep monetary policy tools constant or tinker with the banks’ Cash Reserves Ratio to respond to the increasing economic vulnerabilities caused by the impact of the COVID-19 pandemic.

Others predicted a raise in MPR in a worst case scenario as it is not healthy for inflation rate to catch up with lending rate or for the latter to fall below the headline index.

Perhaps, a reduction of MPR was not an option for experts at this particular point in time when inflation appeared to constitute major threats to macroeconomic stability.

Even members of the MPC have severally highlighted the threats posed by inflation to the economy at their meetings particularly when it concerns options on MPR reduction.

During the January, 2020 MPC meeting, a member of the committee, Adamu Lametek, had voiced concerns that if not addressed, inflation “could soon begin

to undermine economic growth.”

Another member of the MPC, Adenikinju Festus, advised the committee not to ignore the inflation threat, adding that the CBN policy to increase lending to the real

sector was a good policy to boost the supply side of the economy and relax constraints to domestic food and agricultural supply.

Even Emefiele, during the January MPC meeting, acknowledged the “dissatisfying rise in inflationary pressure in the short-term.

He had stated in his personal explanation that, “With December 2019 inflation at 11.98 per cent, the scope for innocuous inflation rate is exhausted as rates above 12 per cent are detrimental to domestic output growth. This underscores the need for effective action to tame inflationary pressures and ensure the trend returns to long-run objectives. I note as well that even as inflation trajectory rises, prevailing macroeconomic stability and short-term prospects remain cautious

due to manifold global and domestic risks.”

Nevertheless, in spite of the inflationary concerns, which had defied the apex bank’s target of 6-9 per cent range, the CBN onThursday resolved to slash the benchmark rate by 100 basis points from 13.5 per cent to 12.5 per cent, leaving other monetary instruments unchanged including the cash reserves ratio and liquidity ratio at 22.7 per cent and 30 per cent respectively.

The reduction in interest rate came despite mounting inflationary pressures.

The MPR climbed to 12 per cent for the first time in the fourth quarter of 2011.

The last time the CBN tweaked the MPR was on March 26, 2019 when it reduced the benchmark from 14 per cent to 13.5 per cent.

CBN Governor, Mr. Godwin Emefiele, who read the MPC communique, issued at the end of its two-day meeting, harped on the need for the federal government to gradually work towards reopening of the economy in line with the recommendation of the presidential task force in COVID-19 and advice from medical experts, insisting that efforts must be directed at saving not only lives, but also livelihoods.

He said this was to enable the resumption of economic activities necessary to stimulate growth, hasten the pace of recovery and restore livelihoods particularly to the vulnerable in our society.

The CBN governor further expressed confidence that Nigeria may be able to escape an impending recession if concerted efforts are sustained to stimulate output.

He said: “Although a sharp decline in output growth is expected in Q2 2020 and may be the third quarter, if the current stimulus initiatives are proper implemented, the economy would reverse to positive growth by the fourth quarter. Hence the optimism on the part of the committee that the economy may not slide into recession

Emefiele, who justified the committee’s decision to reduce interest rate said after reviewing the three options available to it, the “MPC noted that the imperative for monetary policy at the May 2020 meeting was to strike a balance between supporting the recovery of output growth while maintaining stable price development across inflation, the exchange rate and market interest rates.

“To this end, the committee noted that the cash reserve requirement (CRR) was recently adjusted upwards as a means of tightening the stance of policy. In its response to the COVID-19 pandemic, however, the bank reduced interest rates associated with all CBN interventions from 9 to 5 per cent.

“Increasing MPR at this stage will thus be counter-intuitive and will result in upward pressure on retail market rates.”

On the other hand, he noted that holding the MPR constant might slow down the trajectory of the weakened economy compared with a loosening stance, thereby slackening output growth.

He said whereas the MPC was concerned that excess liquidity engendered by loosening may overshoot the economy’s absorptive capacity and accelerate inflationary pressures, nevertheless, he felt that given the slow rate of acceleration of inflation, the accommodative stance will stimulate aggregate demand and supply in the short term.

No doubt, the bold step by the CBN to cut MPR at a peculiar period further demonstrates the commitment of Emefiele to deploy unorthodox monetary policy interventions to reset the economy whenever necessary.

Even though he had been criticised for adopting such practices, the CBN governor had silenced critics by pointing to the effectiveness of such measures in recent times.

A member of the MPC, Obadan Idiah, said through the use of unconventional monetary policy measures that ensure delivery of a high volume of credit to priority sectors of the economy, monetary policy could stimulate a high volume of output which would lower food prices and inflation.

According to him, CBN would therefore need to sustain the unconventional monetary policy measures.

However, several analysts have commended the apex bank over its decision to slash interest rate.

Speaking in an interview with THISDAY, economist and former Director-General, Abuja Chamber of Commerce and Industry (ACCI), Dr. Chijioke Ekechukwu, said: “The CBN clearly indicated their priority to stimulate the economy through credit facilities.

“Since the lockdown, their policies have been geared towards reduction of interest rates by NIRSAL Microfinance Bank to 5 per cent. CBN also reduced its interest rate on its facilities through participating Other Financial Institutions (OFI).

“These actions clearly showed that the CBN is interested in driving the MSMEs. Whether the inflation rate is rising or not, it became necessary to disregard it in line with the objective of CBN in the circumstance.”

Also, Professor of Finance and Capital Markets at the Nasarawa State University and former Imo State Commissioner for Finance, Prof. Uche Uwaleke, said: “The MPC decision to cut the benchmark interest rate by 100 basis points down to 12.5 per cent is a demonstration of the CBN’s sensitivity to the need to stimulate the economy and enable it withstand the negative impact of COVID-19 as well as the drop in oil revenue.

“Having signalled intention to adopt an accommodative stance in favour of growth, the CBN should put in place measures to ensure that it translates to lower lending rates by the banks to the real sectors of the economy.”

Furthermore, Associate Professor of Agricultural Economics at University of Port Harcourt, Anthony Onoja, described the CBN’s action as positive for the economy.

“I think the move to slash the interest rate is a positive response to the recent data of NBS which indicated that the economy was receding. The interest rate reduction will hopefully stimulate production from the real sectors by making access to loans or capital more affordable. Farmers, SMEs in the commodity value chains will use such loans to revive their businesses, which have been negatively affected by the COVID-19 lockdown currently going on in many parts of the country.

“When businesses get back to production they can retain jobs, increase GDP growth and on the long run reduce inflation. However, with the low price of oil, which had negatively affected the value of Naira in the foreign exchange market it is inevitable that we will have to grapple with inflation on the short run,” Onoja.