The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) on Tuesday explained why it opted to retain all monetary policy rates despite wide expectations by financial analysts and economists for reviews.
At the end of the two-day meeting of the committee in Abuja on Monday and Tuesday, the CBN governor, Godwin Emefiele, who presented the communique said members took a unanimous decision to retain the monetary policy rate (MPR) at 13.5 per cent.
Also, the CBN governor said the committee retained the asymmetric corridor of +200/-500 basis points around the MPR; the cash reserve ratio (CRR) at 27.5 per cent, and the Liquidity Ratio at 30 per cent.
The CRR, which is the percentage amount of cash deposit kept with the Central Bank by the deposit money for reserve purposes, was recently reviewed upwards from 22.5 per cent.
The decision to leave the rates unchanged contradicted the expectations of most analysts who would have preferred a cut in MPR to encourage more lending to the real sector apparently blighted by the negative impact of the coronavirus pandemic on the global and Nigerian economy.
But, the CBN governor said the MPC’s decision was informed by various reasons, including taking cognizance the recent actions of the CBN targeted at strengthening the financial system to alleviate the initial impact of the global crisis cause by the coronavirus.
Weighing the options
On tightening, the CBN governor said although the MPC was of the view it would help rein in the rising inflation in the economy as well as support reserve accretion.
On the other hand, he said the committee noted that tightening would result in a reduction in money supply and limit the capacity of DMBs to create credit, thus resulting in increasing cost of credit, with adverse impact on output growth.
“Tightening would also result in a reduction in aggregate demand as a fall in disposable income results in output compression; whereas policy emphasis at this time should be on stimulating aggregate supply and demand, both already weakened by COVID-19,” he added.
On whether to loosen, the CBN governor said the MPC felt the decision would stimulate the economy in the short term, and boost aggregate supply and demand.
However, he said the committee was of the alternative view that there was a need to be cautious, to avoid exacerbating an already worsening inflationary condition, resulting in massive pressure on reserves and the exchange rate.
Based on the balance of the two arguments, the CBN governor said the MPC resolved give the recent actions under the stimulus plan announced by the CBN in response to the COVID-19 pandemic to impact the economy.
Besides, he said the committee decided to allow the crisis to wear out before deciding on further policy measures to boost and strengthen aggregate demand and supply in the recovery phase of the economy.
Again, he said the decision to hold the rates also took into consideration the subsisting Loan-to-deposit ratio (LDR) and the deposit to cash reserve ratio (DCRR) policies to check excess liquidity in the banking system, which an adjustment in the MPR would be counter-productive.
Besides, he said raising the MPR would contradict the recent decision to cut the interest rate for the CBN intervention projects from nine to 5 per cent.
In addition, he said increasing the MPR would be taken by the DMBs as in invitation to increase lending rates, an arrangement that would be a disincentive to effort to avert a recession in the economy.
On the other hand, a reduction in the MPR, the MPC noted, would not encourage the DMBs to reduce lending rates.
COVID-19 Stimulus package
In the wake of the global crisis as a result of disruptions associated with the outbreak of the coronavirus and the oil price war between Saudi Arabia and Russia, the CBN announced a stimulus to protect the Nigerian financial system and the economy.
Some of the interventions, which would involve an injection of about N3.5 trillion to support the Nigerian economy, included the extension moratorium on loans by an additional year beginning from March 2020, to ease the pressure on loan repayments by organizations.
The Bank also reduced interest rates from 9 to 5 per cent on its existing intervention programmes over the next one year; created a N50 billion targeted fund to support households and Small and Medium Enterprises (SMEs) affected by COVID-19 and introduced credit support for the healthcare sector.
Also, the Bnak introduced regulatory forbearance to consider temporary and time-limited restructuring of loan terms and tenors to households and businesses affected by COVID-19, and strengthened the loan-to-deposit ratio (LDR) policy.
To cushion the adverse effects of the Coronavirus outbreak on the economy, the Bank also announced the provision of N1trillion from its intervention fund to support local manufacturing to boost import substitution, and another N100 billion to support the health services sector.
The fund was to provide loans to the pharmaceutical companies, hospitals and other health practitioners to build new hospitals and health facilities or expand existing ones to first class health centres.
This is in addition to the N1.5 trillion private sector driven Infraco Project fund, designed to target the construction of critical infrastructure across the country.
Again, pharmaceutical companies would be assisted through loan interventions to re-establish drug manufacturing firms in Nigeria and curtail the spread of the corona virus.