The Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC), on Tuesday, resolved to tweak its controlling lending rate while retaining its liquidity ratio and cash reserve requirement, to make more money available for lending to critical sectors as the economy braces for a looming recession in the third quarter.
At the end of its September meeting, the MPC said the majority of its members voted to reduce the monetary policy rate (MPR) by 100 basis points, from 12.5 per cent to 11.5 per cent, while adjusting its symmetric corridor around the MPR from +200 and -500 basis points to +100 and -700 basis points.
Also, the committee decided to retain the cash reserve requirement (CRR) at 27.5 per cent and liquidity ratio at 30 per cent.
The CRR is the funds kept with the CBN as a minimum deposit a commercial bank must hold as reserves, rather than lend out to customers, while liquidity ratio is the portion of assets that can easily be exchanged for money compared to the total assets of a bank or other financial institution.
With the country’s economy primed to relapse into another recession come the third quarter of the year as a result of the negative impact of COVID-19 pandemic, the MPC said the decision to cut the lending rate was informed by the need to “provide cheaper credit to critical sectors, improve aggregate demand, stimulate production, reduce unemployment and support the recovery of output growth.”
In May, the committee decided to slash the lending rate from 13.5 per cent to 12.5 per cent to stimulate credit expansion to critical sectors of the economy, stimulate employment and revive economic activity for quick growth recovery from the impact of coronavirus.
Following the outbreak of the coronavirus pandemic, the CBN unveiled various stimulus packages, such as concessionary rates, loan restructuring, and targeted loans to agriculture, manufacturing and health sectors to spur economic recovery in the country.
Before the May reduction, the last time the CBN adjusted the MPR was in March 2019, from 14% to 13.5% after keeping the controlling lending rate unchanged for 13 consecutive times since July 2016.
The Chairman of the MPC and CBN governor, Godwin Emefiele, said in view of the declining growth in the economy and the rising inflation in recent times, the latest decision on the monetary policy fundamentals was a difficult one for the committee as it required a lot of trade-offs to ensure price stability and support the recovery of output growth.
Some members proposed the need to tighten the monetary policy stance to help address the rise in domestic prices, by moderating upward pressure on prices and attract fresh capital into the economy and improve external reserves level.
But, Mr Emefiele said the overall resolution was against tightening the MPR, as the majority opinion was that it may stifle output growth and further drag the economy further into contraction.
On the option to consider easing, the CBN governor said the MPC was of the view that this would provide cheaper credit to improve aggregate demand, stimulate production, reduce unemployment and support the recovery of output growth.
Mr Emefiele said the committee believed that, with inflation trending upwards, easing of the monetary policy stance may increase money supply and exacerbate the current inflation rate put by the National Bureau of Statistics (NBS) at about 13.39 per cent in September.
Besides, he said, the MPC noted the tendency of a corresponding response to the downward price adjustment by other depository operations, thereby undermining the overall benefits of the efforts to reduce the cost of capital.
Consequently, the CBN governor said, the committee was convinced the decision to hold the lending CRR and liquidity ratio, while reducing the the lending rate would allow the economy to adjust to the ongoing stimulus measures by the monetary and fiscal authorities to curb the downturn in the economy and allow more time for the MPC to assess their impact on the economy.
“The decision will complement the CBN’s decision to support economic recovery and reduce the negative impact of COVID-19 pandemic,” Mr Emefiele said.
“Also, the liquidity injections are expected to stimulate credit expansion to the critically impacted sectors of the economy output growth and economic recovery,’’ he added.
The CBN governor also reaffirmed the apex bank’s commitment to continue to play a dominant role in providing support to the government through its development finance activities to achieve growth and strengthen the economy in view of the continued decline in revenue from crude oil exports, lack of fiscal buffers and high burden of debt services.
“This why the MPC will continue to play a dominant role in the achievement of the goals of the economic sustainability programme through its interventionist roles to move the country towards economic stability and sustained recovery, by boosting output growth and moderating inflation.
“The CBN management must take bold actions to stabilize the foreign exchange rate,” he said.