CBN Moves To Restart Post-COVID Economic Growth, Crashes MPR To 50-Month Low

Meeting Didn’t Address Hindrances To Growth- Analysts

In a bold move aimed at driving down lending rates in the country, members of the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC), rose from their regular two-day meeting for the month of September, with six of the 10 members voting to cut the benchmark Monetary Policy Rate (MPR) by 100 basis points to 11.5%. One member opted for a 50bps rate cut, three voted to maintain the rate, while members unanimously agreed to retain the Cash Reserve Ratio and Liquidity Ratio at their current levels. Nine members voted to change the Asymmetric corridor around the MPR while one voted to leave it unchanged.

The cut, the second for this year, brings the MPR to its 50-month low, in what the apex bank said is in line with a commitment to complement fiscal policy with a view to restarting growth post-COVID 19.

The cut, the lowest in since February 2016, further worsens the real rate of returns for investors, considering that inflation rate for the month of August rose by 13.22% last month, according to data by the National Bureau of Statistics (NBS).

Also, with the decision by the apex bank to base the interest rates on retail deposits at 10% of MPR, has further dropped to 1.15% per annum, from 1.25%, as members also focused attention on declining domestic output.

Given this further rate crash, analysts at Lagos-based investment banking group, Cordros Capital, see a downward adjustment in yields in the fixed income market as a consequence. This, it continued, makes the equities market even more attractive and worth a second look.

Addressing newsmen at the end of the meeting, the CBN Governor and MPC chairman, Godwin Emefiele, on Tuesday, acknowledged the monetary policy dilemma, given the reality of its primary role of price and monetary stability and “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 thethird quarter of 2020 output growth numbers further show a contraction.

“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,” given what the communiqué noted, “are factors such as the recent removal of subsidy on fuel price, the increase in energy prices, and the adjustment of the exchange rate.

All of these, it noted, will result in inflationary pressure that will no doubt persist unless MPC consider options that will deal with the pressure aggressively, hence the decision by the committee to abate the pressure.

Consequently, he said member decided “to pursue an expansionary monetary policy using development finance policy tools, targeted at raising output and aggregate supply to moderate the rate of inflation.

“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, and lack of fiscal buffers and high burden of debt services.”

Also, “given that the currency adjustment was a causal factor in determining the price of petroleum products and energy prices, the MPC believes that the CBN management must take bold actions to stabilize the exchange rate.”

The CBN management was further enjoined by the MPC to continue providing “funding to sectors that will resolve the supply constraints in petrol pricing, energy pricing and food availability.

“To support household consumption, the MPC enjoined management to aggressively channel its funding to targeted households, SMEs and consumer credit by further increasing its lending activities through its NIRSAL Microfinance Bank (NMFB).

The management was also directed to ensure that DMBs respond to the reduction in deposit rates by aggressively lowering cost of credit to borrowers.”

As a way of boosting output growth, the MPC listed air and road transportation; entertainment and accommodation; food services; and education subsectors were adversely affected by the lockdown and therefore in need of relief to catalyse growth and improve output numbers.

He urged “Nigerians to support the local production and consumption of food items in which the country has comparative advantage,” reiterating the need to diversify the economy and grow foreign exchange revenue base.

The nation’s banking sector, Emefiele assured, is strong enough to support the needed economic growth post-COVID, especially given the total loans which rose 28.87% from N15tr in June 2019, to N19.33tr in August 2020.

Despite the growth, the CBN said risk management level in the sector improved, as shown by the drop in Non-Performing Loans (NPLs) from 9.4% in June 2019 to 6.1% in August 2020. This is still higher than the regulatory benchmark of 5%.

Commenting further on the MPC’s decision, Cordros Capital noted that although lower rates are intended to compel banks to extend more credit to the real sector, the concern among banks “will still lie around asset quality and systemic risk.

“Consequently, we do not expect any significant growth in domestic credit or aggregate demand, especially given the historical ineffectiveness of the MPR in stimulating output and also the negative impact of the pandemic on household income.”

They noted that the apex bank “did not address the issue of the exchange rate, and forex illiquidity, which in our view, are major hindrances to any meaningful economic recovery.”