The Centre for the Promotion of Private Enterprise (CPPE) has welcomed the Central Bank of Nigeria’s decision to cut the Monetary Policy Rate (MPR) by 350 basis points to 23 per cent, saying the move could reduce financing costs, support investment, and stimulate economic growth.
The CBN announced on Tuesday a reduction in the benchmark interest rate, the MPR, from 26.5 per cent, following the conclusion of the 307th Monetary Policy Committee (MPC) meeting in Abuja.
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In a policy brief signed by its Chief Executive Officer, Muda Yusuf, on Tuesday, CPPE described the adjustment as a significant shift from the prolonged restrictive monetary policy regime.
“The magnitude of the adjustment was largely unexpected and represents a significant shift from the prolonged restrictive monetary policy regime.
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“It signals an important rebalancing of monetary policy towards supporting growth, investment and economic recovery, while preserving price and financial-system stability,” the organisation said.
The private-sector advocacy group also hailed the review of the asymmetric corridor around the MPR from +50/-450 basis points to +50/-300 basis points, saying it further reinforced the recalibration of the monetary policy framework.
CPPE said the rate adjustment was timely, given the improvement in the inflation trajectory and the rising costs associated with a restrictive monetary environment.
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It noted that the previous MPR of 26.5 per cent had become misaligned with inflation of about 15.4 per cent and prevailing money-market rates of around 20 per cent.
According to the group, the misalignment weakened the signalling function of the policy rate and raised concerns about the effectiveness of monetary policy transmission.
“The reduction of the MPR to 23% should therefore be viewed not merely as monetary easing, but as an important realignment of the policy rate with prevailing macroeconomic and financial-market conditions,” CPPE said.
Financial cost
The think tank said the adjustment could provide relief to businesses, particularly those operating in manufacturing, agriculture, construction and logistics, where high financing costs have constrained investment, production and working capital.
It said the policy adjustment could reduce the cost of capital, improve business cash flows, stimulate investment, and strengthen the economy’s productive capacity.
However, CPPE said the benefits would depend largely on how effectively the new policy rate is transmitted to the real economy.
“The CPPE expects banks to reflect the new monetary policy environment in the pricing of credit. Lending rates on both new and existing facilities should progressively adjust downwards.
“Without meaningful transmission to borrowers, the impact of the policy adjustment on investment and economic growth would be limited,” it said.
Government borrowing
The organisation also said the rate reduction could have implications for the Federal Government’s domestic borrowing costs.
It said the high-interest-rate environment had increased the government’s domestic debt-service burden, as government securities competed with high market yields.
According to CPPE, sustained moderation in interest rates could reduce the marginal cost of government borrowing and, over time, moderate domestic debt-service costs.
It said this could create additional fiscal space for infrastructure, security, education, healthcare and other development priorities.
“The fiscal dividend would, however, depend on the extent to which the MPR adjustment translates into lower yields across the government securities market,” the think tank added.
FX, capital-flow risks
Despite acknowledging the rate reduction, CPPE warned that the adjustment could create risks for the foreign exchange market and portfolio flows.
It said the divergence between Nigeria’s monetary policy direction and recent rate increases by some major central banks could affect interest-rate differentials and the attractiveness of naira-denominated financial assets.
“This creates a potential risk of portfolio-flow reversals and renewed pressure on the foreign-exchange market,” the group said.
CPPE, however, said Nigeria was entering the policy transition with a stronger external position than during previous episodes of monetary easing.
It cited improvements in foreign reserves, greater stability in the foreign-exchange market and stronger external-sector buffers as factors that could provide the CBN with greater policy headroom.
The organisation urged the CBN to remain vigilant and, where necessary, use monetary policy instruments, including open market operations, to manage excessive volatility and preserve exchange rate stability.
Cautions
CPPE also cautioned that lower interest rates alone would not be sufficient to deliver sustainable economic recovery.
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It said structural factors, including energy costs, logistics bottlenecks, insecurity, food-production constraints, infrastructure deficits and high regulatory costs, continued to put pressure on prices and business operating costs.
“The current monetary recalibration should therefore be complemented by stronger fiscal and structural interventions aimed at reducing production costs, improving productivity, strengthening food and energy security, and expanding domestic productive capacity,” it said.
The group said this would be necessary to ensure that lower interest rates translate into increased investment and output rather than renewed inflationary pressure.
“The priority should therefore be to ensure effective monetary policy transmission while carefully managing liquidity, portfolio-flow and exchange-rate risks,” CPPE said.
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