Why Nigeria’s monetary policy rates, parameters were not changed – Emefiele

Godwin Emefiele, CBN Governor

The Central Bank of Nigeria, CBN on Tuesday explained why its monetary policy committee, MPC, resolved to retain all monetary policy rates and parameters.

The CBN governor, Godwin Emefiele, told reporters after the MPC meeting in Abuja that the committee opted to retain the monetary policy rate, MPR, at 14 per cent, and cash reserve ratio, CRR, at 22.5 per cent.

MPR is the rate the CBN lends money to commercial banks, while CRR is a monetary tool used to either call up excess liquidity in the system, or release funds needed to stimulate the growth of the economy as situation demands.

Besides, liquidity ratio was maintained at 30 per cent, with the asymmetric corridor at +200 and -500 basis points around the MPR.

In his review, Mr. Emefiele said the resolution took into consideration the challenges the domestic economy was facing and opportunities for achieving price stability, conducive to growth in 2017.

The CBN governor identified those challenges to include the persisting inflationary pressures, continuing output contraction, high unemployment rate, elevated demand pressure in the foreign exchange market, low credit to the real sector and weakening financial system indicators.

Although he acknowledged the improved implementation of the foreign exchange policy that resulted in Naira’s recent appreciation, Mr. Emefiele said the committee was satisfied with the release of the Economic Recovery and Growth Plan, urging its speedy implementation with clear timelines and deliverables.

The committee, he said, noted the arguments in favour of tightening monetary policy, particularly with real policy rate remaining negative, upper reference inflation band substantially breached, and elevated demand pressure in the foreign exchange market.

Given the Central Bank’s primary mandate of price stability, Mr. Emefiele said tightening the monetary policy, by adjusting the rates at this time, would portray it as insensitive to growth.

“The deposit money banks may easily reprice their assets, which would undermine financial stability. Besides, the committee noted the need to create binding restrictions on growth in narrow money and structural liquidity and the imperative of macroeconomic stability to achieving price stability conducive to growth,” he explained.

He added that the committee also considered the arguments for loosening the stance of monetary policy, noting its desirability in stimulating aggregate demand if credit increased with lower rates of interest.

Other reasons for retaining rates was the argument that loose monetary policy was capable of delivering cheaper credit, making it more attractive for Nigerians to acquire assets, thus increasing wealth and stimulating aggregate spending and confidence by economic agents, and eventually lead to lower Non-performing loans, NPLs in the system.

“Loosening (the rates) would thus worsen the already negative real interest rate, widen the interest rate spread and reverse the positive outlook for the current account position,” he pointed out.

While reiterating its resolve to continue pursuing financial system stability, the MPC urged the Central Bank to work with deposit money banks to promptly address rising non-performing loans, declining asset quality, credit concentration and high foreign exchange exposures.

The committee further argued that cutting monetary policy rates at this time would exacerbate inflationary pressures, worsen the exchange rate and further pull the real interest rate into negative territory.

“Since interest rates are sticky downwards, loosening may not necessarily transmit into lower retail lending rates,” the committee noted.

On the impact of the series of interventions in the inter-bank foreign exchange market, the CBN governor said following a presentation to the National Economic Council, NEC, on the Nigerian economy and the forex market, the bank was advised look into all the issues that affected the market.

However, prior to the NEC meeting, Mr. Emefiele said, the Central Bank had noticed the rising trend in the exchange rate movement, particularly at the parallel market, and decided to intervene to reverse the trend.

“The CBN is happy the interventions have proved positive, with the parallel market and inter-bank market rates converging. We are strongly optimistic that the rates would converge further,” he said.

On criticism that the interventionist policy was not sustainable, he said with foreign reserves trending consistently upwards in the last four to five weeks to almost $31 billion, there was no doubt about the strength of the CBN to sustain the intervention.

“Those doubting will lose in their bid to place a wrong bet on the direction the CBN is going. There is the determination to implement all the elements of the floating foreign exchange.

“It is a programme that is on course. We are happy it is looking good beyond our expectation,” he said.

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