*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.”
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