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Why CBN suddenly cuts benchmark interest rate to 11.5% ~Emefiele

By on September 22, 2020 0 94 Views

The Central Bank of Nigeria (CBN) on Tuesday slashed its Monetary Policy Rate (MPR) by 100 basis points to 11.5 percent, citing needs to provide cheaper credit to improve aggregate demand in the economy as part of its reasons.

“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,” Governor of the CBN Godwin Emefiele said at the end of the MPC meeting.

The regulatory bank said the MPC considered instead that the useful policies will be the supply-side measures implemented by the Bank.

“On easing the stance of policy, the MPC was of the view that this action would provide cheaper credit to improve aggregate demand, stimulate production, reduce unemployment and support the recovery of output growth,” Emefiele said at the end of the MPC meeting.”

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Emefiele said; “The Committee noted that available evidence does not support the view that the rise in inflation was due to monetary factors.

“Rather, there is overwhelming evidence that the inflationary pressure reflects the prevalence of structural rigidities and supply shocks. Hence, the traditional tools of monetary policy may not be helpful in addressing current inflationary pressures,” Emefiele stated.

Analysts at the United Capital Plc had in a note said that despite the recent policy reforms observed in the energy sector, (Subsidy removal, electricity tariff adjustment), “we doubt that the Committee will tweak any of the policy variables.

“However, we are of the view that the MPC will have to brainstorm on the appropriate policy dosage to apply in other to restore GDP Growth, pullback inflation to below 12 percent, resolve the dislocation between the market rate of interest and real return to attract foreign investment as well as stimulate domestic savings, and lastly, fix the currency market illiquidity which remains the elephant in the room.”

Many market observers were taken aback with the rate cut, they claimed that the rate cut could further trigger inflationary growth despite the claims by the CBN to the contrary.

The governor stated that while the MPC remains committed to its primary mandate of ensuring price stability, it, however, noted the need to address the structural supply-side issues that are putting upward pressure on
production cost and depressing economic growth.

The regulatory bank also expressed concerns that with inflation trending upwards, easing of the policy
stance may exacerbate the current inflationary pressure through an increase in money supply.

“In addition, the MPC noted the tendency of an asymmetric response to downward price adjustments by ‘Other Depository Corporations’, thus undermining the overall beneficial impact of a reduction to the cost of capital,” Emefiele said.

The committee at the end of the meeting adjusted the asymmetric corridor from +200/-500 basis points to
+100/-700 basis points around the MPR.

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