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Wednesday, September 23, 2020

CBN prepares for recession, reduces benchmark lending rate to 11.5%

 


The Central Bank of Nigeria on Tuesday reduced the Monetary Policy Rate by 100 basis points from 12. 5 per cent to 11. 5 per cent after its two -day Monetary Policy Committee meeting in Abuja .


The 10 members of the committee who were in attendance voted to retain the Cash Reserve Ratio and Liquidity Ratio at 27. 5 per cent and 30 per cent respectively .


The MPC adjusted the asymmetric corridor from +200/-500 basis points to +100/-700 basis points around the MPR .


The Central Bank Governor , Godwin Emefiele, disclosed these while presenting the communiqué after the meeting.


He said , “ At present , fiscal policy is constrained and so cannot , on its own , lift the economy out of contraction or recession given the paucity of funds arising from weak revenue base , current low crude oil prices , lack of fiscal buffers and high burden of debt services. ”


He said the committee expressed deep concern on the continued uptick in inflation for the twelfth consecutive month as headline inflation ( year - on -year) rose to 13. 22 per cent in August from 12. 82 per cent in July 2020.


“ The increase in headline inflation was largely driven by the persistent increase in the food component , which rose to 16 per cent in August 2020 from 15. 48 per cent in July 2020, ” he said .


Emefiele said the committee stressed the urgent need for a combination of broad -based monetary and fiscal policy measures to curb the rise in inflation and contraction in output growth.


Explaining further, he said , “ In the light of this , reducing MPR will signal to the Deposit Money Banks to lend more to stimulate growth, increase aggregate supply , which should dampen prices in the immediate term. ”

Emefiele said , “ The MPC was , at this meeting, confronted by policy dilemma.


“ Whereas MPC believes in the primacy of its price and monetary stability mandate, it nevertheless was confronted with what policy direction to focus on , given the contraction in output growth during the second quarter of 2020, which may lead to a recession, if the third quarter of 2020 output growth numbers further show a contraction .


“ It is , therefore , of the view that, if a recession occurs in Q 3, the committee would be confronted with proposing policy options in a period of stagflation. ”


“ The committee also noted the rising public debt profile and urged the fiscal authority to strengthen its debt management strategy , explore other sources of revenue, as well as enhance efficiency in public expenditure, ” he added .


Financial experts, however , differ on the reduction in the MPR .


The Director- General , Lagos Chamber of Commerce and Industry, Dr Muda Yusuf , said , “ The adjustment of the MPR by 100 basis points from 12. 5 per cent to 11. 5 per cent by the MPC was a surprise .


“ My expectation was that the status quo would be maintained .


“ Rates were already generally low in the money market. In fact , concerns were being expressed about the fact the real savings and deposits rate were negative .


“ But, I do not believe it would have any material impact on lending rates. ”


A former President , Association of National Accountants of Nigeria , Dr Sam Nzekwe, praised the CBN for the reduction in the lending rate.


He said , “ That is a good development and it shows they are beginning to listen to what we are saying because some of us have always said the interest rates should come down. ”


Professor of capital market, Nasarawa State University, Prof. Uche Uwaleke , said , “ I expected the MPC to maintain the status quo , to hold the rates because of the spike in inflation that we witnessed last month. ”


He added that the inflationary pressure and the pump price of fuel which was recently increased would exert more pressure on inflation.

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