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CBN retains economic parameters amid naira devaluation to N410/$

*Experts support decision to hold lending rate at 11.5%

*As apex bank maintains CRR, Liquidity Ratio at 27.5%, 30%



At the close of the two-day meeting of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), the members unanimously voted to retain major economic parameters, with the benchmark lending rate at 11.5 per cent.

This is even as the apex lender has officially devalued the naira to N410 per dollar bowing partially to months of pressure by the International Monetary Fund (IMF) to allow the forces of demand and supply to determine the country’s foreign exchange market.

Reading the communiqué at the end of the MPC meeting in Abuja on Tuesday 25th May 2021, the CBN Governor, Godwin Emefiele disclosed that the Monetary Policy Rate (MPR), which is known as the benchmark lending rate was retained at 11.50 per cent, while the asymmetric corridor of +100/-700 basis points around the MPR.

This implies that interest rates for loans will remain as it is since September 2020 when the MPC reduced MPR by 100 basis points from 12.5 per cent to 11.5 per cent.

The Cash Reserves Ratio (CRR) was retained at 27.5 per cent, while the Liquidity Ratio was kept at 30 per cent.

The CBN governor, however, noted that the economic recovery is “still fragile”.

A Finance expert and President of the Association of Capital Market Academics (AMAN), Prof. Uche Uwaleke has backed the Central Bank of Nigeria’s(CBN’s) decision to hold all Monetary parameters constant.

Speaking to The Daily Times, he said “I think a hold position was the most expedient decision to take given the prevailing economic condition of the country.

“As long as Stagflation continues to challenge the economy, the CBN’s monetary policy stance will be dictated by the need to strike a balance between tackling inflation and supporting economic growth.

“Against the backdrop of elevated inflation, a reduction in MPR or other policy parameters, though persuasive, will only serve to worsen forex pressure despite recent attempt to unify Exchange rates, and exacerbate the inflationary trend.

“On the other hand, given weak economic growth and the need to support an economy still reeling from the impact of COVID’19 pandemic, tightening monetary policy via an increase in MPR is capable of rolling back the modest progress being made.”

Uwaleke added that it’s instructive to note that the non-oil sector GDP actually tanked during the first quarter of 2021.

“So, maintaining the status quo while strengthening the CBN’s intervention initiatives in critical sectors of the economy is a wise decision”, he said.

It would be recalled that the National Bureau of Statistics (NBS) earlier in the week, had announced that the nation’s Gross Domestic Product (GDP) increased by 0.51 per cent in the first quarter of 2021.

Emefiele said although a GDP increase was recorded, the economic recovery from inflation in 2021 remains fragile.

“In the view of the MPC, although the economy has recovered from the recession, the recovery was very fragile given that the GDP of 0.51 per cent was still far below population growth rate,” he said.

“The committee, therefore, was of the view that there is a strong need to consolidate on all administrative measures currently being taken to spur output growth.”

Emefiele said the MPC urged the federal government to address the challenge of insecurity and infrastructure deficit.

He said the challenge will hamper the apex bank’s credit facility to households, micro small and medium enterprises, and the agricultural sector, among others.

Meanwhile, the Central Bank has officially devalued the naira to N410 per dollar bowing partially to months of pressure by the International Monetary Fund to allow the forces of demand and supply to determine the country’s foreign exchange market.

This is based on the new rate updated on the regulator’s website.

With the development, the Central Bank has harmonised the official rate with the Investors’ & Exporter (NAFEX) Windows where investors and exporters trade.

However, another challenge for the regulator would be the parallel market rate which currently trades at N486 per dollar.

Less than a week ago, the bank removed the exchange rate of N379 per $1 from its website homepage.

Also, commenting on the outcome of the MPC meeting, analysts at Cordros Securities said, “We believe the Committee’s view is justified given the attendant impact of high system liquidity on demand-pull Inflation and exchange rate pressures.”

According to the analysts, in our view, the unimpressive GDP growth of 0.51 per cent in Q1-21 may have prompted the hawks to align with the broader view of the Committee that an accommodative monetary stance is still required to restore the productive capacity of the economy and bridge the negative output gap.

“We align with the Committee given the recent rally in oil prices continued impact of government intervention on the agriculture and manufacturing sectors, amidst improving domestic demand.

Overall, we expect the economy to consolidate on the tepid recovery and forecast a growth rate of 3.37 per cent year-on year (y/y) in Q2-21 with a full-year GDP growth rate of 2.63 per cent y/y.”

On Inflation, the analysts said, “accordingly, we believe the headline inflation will maintain its uptrend in the near term before base effects set in at the second half of the year. Consequently, we look for an average inflation rate of 18.06 per cent y/y in 2021FY (2020FY: 13.21% y/y).

Expressing their views on the Committee’s options of tightening, loosening or maintaining the status quo, the Cordros analysts said, “on tightening, the Committee acknowledged that while such a policy action will help address the stubbornly high Inflation, it will constrain the flow of credit to the private sector and upset the economy’s fragile recovery.

“Besides, while tightening will address the monetary components of the inflationary pressure, supply-side constraints (which are the major factors pushing inflationary pressure) can only be addressed by policies outside the scope of the CBN.

“We believe the Committee’s view is justified given the attendant impact of high system liquidity on demand-pull Inflation and exchange rate pressures.”

On a balance of factors, “we note that the Governor struck a neutral tone, unlike the hawkish tone at its March meeting.

For us, this reflects that the Committee is trying to achieve the competing goals of price stability and supporting economic recovery.

As things stand, the future path of monetary policy may be difficult to predict due to the balancing act of the MPC.

“Notwithstanding, we believe the decision of the Committee to tighten monetary policy will be primarily influenced by its assessment on whether substantial progress has been made in restoring the economy to the path of growth from the pandemic-induced slump in 2020.

“In the meantime, we think the apex bank will sustain the use of its administrative measures and secondary “toolbox” such as the (1) Naira for Dollar Scheme, (2) CRR debits, (3) Loan-to-Deposit Ratio (LDR) and (4) direct intervention in the agriculture and manufacturing sectors to manage system liquidity, enhance FX liquidity and boost output growth.”

Central Bank of Nigeria

Source: dailytimes.ng

BHG-InfoDesk 

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