Desirous of Spurring Lending, CBN Cuts MPR to 11.5%


•To contribute N1.8tn economic plan

By Obinna Chima, Nume Ekeghe in Lagos and James Emejo in Abuja

In a surprise move yesterday, the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) resolved to reduce the Monetary Policy Rate (MPR) by 100 basis points to 11.5 per cent from 12.5 per cent.

The move is expected to encourage more bank lending in order to stimulate economic activities.

The MPR is the rate which the apex bank lends to commercial banks and often determines the cost of funds.

However, the MPC adjusted the asymmetric corridor to +100/-700 basis points around the MPR from +200/-500 basis points, retained the Cash Reserve Ratio (CRR) at 27.5 per cent as well as the Liquidity Ratio at 30 per cent.

Addressing journalists at the two-day meeting of the Monetary Policy Committee (MPC) in Abuja, the CBN Governor, Mr. Godwin Emefiele, said six members of the committee voted to reduce the MPR by 100 basis points, while one member voted to slash it by 50.0 basis points as well as three members who voted to hold the rate at the current level.

He said nine members voted to change the asymmetric corridor while one member voted to hold while all members voted to hold the CRR and liquidity ratio.

The CBN governor said the MPC was confronted with a difficult set of policy choices, requiring trade-offs and sequencing amidst declining economic growth and rising inflation and bearing in mind its primary mandate of price stability and the need to support the recovery of output growth.

He said the committee was of the view that easing policy stance would provide cheaper credit to improve aggregate demand, stimulate production, reduce unemployment and support the recovery of output growth.

It, however, observed that with inflation trending upwards, easing of the policy stance may exacerbate the current inflationary pressure through an increase in the money supply.

In addition, the MPC noted the tendency of asymmetric response to downward price adjustments by ‘Other Depository Corporations,’ thus undermining the overall beneficial impact of a reduction in the cost of capital.

On the other hand, the committee noted that the likely action aimed at addressing the rise in domestic prices would have been to tighten the stance of the policy, as this will not only moderate the upward pressure on prices but will also, attract fresh capital into the economy and improve the level of the external reserves.

The MPC also noted that a hold position will allow the economy to adjust to the ongoing stimulus measures put in place by the monetary and fiscal authorities to curb the downturn and allow more time for the MPC to assess their impact on the economy.

He said: “After the consideration of the three policy options, Members were of the opinion that the option to loose will complement the bank’s commitment to sustain the trajectory of the economic recovery and reduce the negative impact of COVID-19.

“In addition, the liquidity injections are expected to stimulate credit expansion to the critically impacted sectors of the economy and offer impetus for output growth and economic recovery.”

According to the apex bank boss, the MPC had expressed deep concern on the continued uptick in inflation for the 12th consecutive month as headline inflation (year-on-year) rose to 13.22 per cent in August from 12.82 per cent in July.

The CBN noted that the increase in headline inflation was largely driven by the persistent increase in the food component, which rose to 16.00 per cent in August 2020 from 15.48 per cent in July 2020.

It noted that the upticks were driven primarily by legacy structural factors such as the inadequate state of critical infrastructure and broad-based security challenges across the country, which dampened production activities.

Other factors include the disruptions to supply chains following restrictions to move to curb the spread of the pandemic, adverse weather conditions, which resulted in the flooding of farmlands as well as the inflation pass-through to domestic prices following the depreciation in the exchange rate.

The committee further observed that the recent increase in energy cost is also expected to further impact the domestic price level in the short-term.

Emefiele also disclosed that the CBN was set to contribute over N1.8 trillion of the total sum of N2.30 trillion needed for the federal government’s 1-year Economic Sustainability Plan (ESP), through its various financing interventions using the channels of Participating Financial Institutions (PFIs).

He said the key factors considered by the MPC is likely to exert upward pressure on domestic prices in the near term included the prevalence of security challenges in the country; adverse weather conditions causing flooding in some farming regions; the increase in petroleum pump price; deregulation in electricity tariff; low crude oil price; and exchange rate adjustment.

Reacting to the outcome of the meeting, London-based Chief Economist, Africa/Middle East, Standard Chartered Bank, Razia Khan, in a note, stated that the CBN surprised markets by the decision to ease monetary policy.

He said: “Despite recent pressure on inflation caused by higher food prices, and the expectation of further pressure in the near-term as power sector and fuel subsidy reforms get underway, the CBN brought forward an easing that we had only expected at the November meeting.

“By cutting the policy rate and also adjusting the corridor around the monetary policy rate, this was a deeper easing than we would have expected at this stage.

“The CBN attributes price pressures largely to structural rigidities. It is eager to encourage continued bank lending – especially to critical sectors, especially at subsidised rates – in order to overcome structural issues. Notwithstanding recent pressure on inflation, we have seen the announcement of a significant easing today.

“The effect of this cut will be to push the rate on the standing deposit facility (the lower corridor around the MPR) even lower, to 4.5 per cent (from 7.5 per cent earlier). This is more in line with existing market rates – correcting what previously looked like a bigger mismatch between the policy rate and market interest rates.

“However, with banks still likely facing an upper limit of N2 billion as the amount that can be placed with the CBN, this will force banks to do something else with any additional liquidity.”

She added: “Given current economic weakness, however, generating the lending that might resolve price bottlenecks, might take a little longer. Any infrastructure project, for example, will likely only be completed in the medium-term. There will be no immediate inflation relief, however well-intentioned the policy.

“The bigger issue surrounds the more immediate drivers of inflation – forex bottlenecks that might complicate any effective harmonisation plans. The action of easing policy while inflation is still accelerating, sends – at best – a mixed message around Nigeria’s willingness to re-open the forex market.”
Speaking in an interview with THISDAY, Managing Director, Afrinvest Research, Mr. Abiodun Keripe, said though not unexpected, the reduction in MPR posed huge challenges for the rest of the economy.

“It is not surprising that the Committee agreed to cut the MPR, although this deviates from expectation. The biggest challenge is that the MPR is somehow disconnected from the rest of the economy in terms of its transmission effect. By reducing the MPR, the Committee is signalling that there’s an urgent need to boost growth via cheaper credit given the recession overhang.

“I think most banks have appropriately priced their loan books to reflect recent dynamics in the economy if you consider how the COVID-19 pandemic has affected businesses and households. Notwithstanding, negative real returns just widened as the September inflation outlook is sticky upwards. I maintain that the focus should be on how to bring about a balance in the foreign exchange market by allowing full price discovery and liquidity. This will have the most desired impact on business outputs, employment, and growth.”

On his part, Head of Research at United Capital, Mr. Wale Olusi, said though the CBN measure was aimed at safeguarding the economy, it could however further fuel inflation.

“This was in a bid to salvage the economy from the negative impact of COVID-19 outbreak and reflate the economy by further complementing the CBN’s current expansionary policy stance.

“Inflation – negative as the dovish outcome is likely to stoke inflationary pressures amid injection of fresh liquidity into the financial system even as the demand-side remains depressed.”

Also commenting on the development, an investment professional, Mr. Ayodeji Ebo, on the other hand, describes the tweak as “a surprise cut” adding that the apex bank was “just trying to signal as much as possible that they want the lending rate to come down so that there can be growth. But historically, we feel that there might be other measures that they would need to be applied before we can see a major decline in inflation. Because the inflation rate is still very eminent and the banks would consider that before lending.”

He said: “The loan to deposit ratio policy by the CBN caused a lot of banks to increase their lending then and we would not be surprised to see a circular that would take Cash Reserve Requirement (CRR) from 65 to 70 per cent. That may have more effect than the MPR rate because most times the banks don’t adjust their rates.”