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 to13.22 per cent in August from 12.82 per cent in July 2020.

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“The increase in headline inflation was largely driven by the persistent increase in the food component, which rose to16 per cent in August 2020 from 15.48 per cent in July2020,” 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.

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“It is, therefore, of the view that, if a recession occurs in Q3, 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.”

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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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