MPC reviews downwards MPR to 12.5%, retains other policy parametres

MPC reviews downwards MPR to 12.5%, retains other policy parametres
Written by Maritime First

…As Analysts say MPR reduction will increase money, credit in circulation***

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), on Thursday, reviewed downwards Monetary Policy Rates from 13.5 per cent to 12.5 per cent.

It, however, held all other policy parameters constant.

Mr Godwin Emefiele, the Governor of CBN made this known while reading the communique on the outcome of the meeting in Abuja.

Emefiele explained that seven members voted for a reduction of MPR by 100 basis points, two members went for 150 basis points and a member voted for 200 basis points.

He said the committee retained Asymmetric Corridor of +200 -500 basis points around the MPR.

He disclosed that MPC also retained Cash Reserves Ratio (CRR) at 27.5 per cent as well as Liquidity Ratio at 30 per cent.

According to him, the MPC noted that if all stimulus packages already announced by the apex bank are well utilised, it will produce impetus needed to boost economic recovery in the country.

“After reviewing the three options, the MPC noted the imperative to monetary policy at the May 2020 meeting was to strike a balance between supporting the recovery of output growth while maintaining stable price development across inflation.

“Other considerations were the exchange rates and market interest rates. To this end, the committee noted that CRR was recently adjusted upward as a means of tightening the stand of policy.

Also read:  MPC: Don predicts CRR reduction to 22.5% due to coronavirus

“In its response to COVID-19 pandemic, however, the bank reduced interest rates associated with all CBN interventions from nine to five per cent.

“Increasing MPR at this stage will be counter-intuitive and it will result in upward pressure on retail market rates,” he explained.

The governor said that the committee maintained that although a sharp decline in output growth was expected in the second quarter of 2020.

He, however, noted that in the third quarter, if the current stimulus packages initiated by CBN were properly implemented, the economy would reverse to positive growth by the fourth quarter.

He added that there was optimism on the part of MPC that the country might not slide into recession.

In the meantime, some financial analysts on Friday said the unexpected reduction of the Monetary Policy Rate (MPR) from 13.5 to 12.5 per cent, as announced by the Central Bank of Nigeria (CBN) was contrary to their expectations.

They said they actually expected a hold decision would be taken, as happened during the last meeting.

However, they noted that the decision would expand level of output in the economy and to some extent address inflation trend occasioned by the COVID- 19.

The Monetary Policy Committee (MPC) of CBN on Thursday reduced MPR or the controlling lending rate to 12.5 per cent and left other monetary policy parameters unchanged.

The committee resolved to retain the Liquidity Ratio at 30 per cent, Cash Reserve Requirement (CRR) at 27.5 per cent and the asymmetric corridor at +200/-500 basis points around the MPR.

Speaking in an interview with NAN, the Managing Director, BIC Consultancy Services, Dr Boniface Chizea, said the reduction would increase the amount of money and credit in circulation.

“The reduction is uncommonly steep by an unusual 100 basis points. A reduction from 13.5% to 12.5%, the lowest rate in four years. The committee advanced the reason as the need to reflate the economy.

“What the unfolding scenario portends is that citizens should brace up for a spike on the rate of inflation which had already been on the uptick as substantial liquidity is being injected into the economy as a result of the quantitative easing.

“The gradual unlocking of the economy to resume activities might result in the anticipated contraction of the economy not being as steep as feared.

“By this move it is clear that focus on the rate of exchange particularly with regard to the attractiveness of investments to foreign investors is for once not a major thrust of policy.

“Well at least we now have some movement in the critical indices as opposed to the fact that they have remained sticky for a long time now,’’ Chizea said.

According to him, it is important that we witness focused implementation so that the expectations of a reflated economy will be achieved in the not distant future.

In the same vein, the Managing Director of Cowry Assets Management Ltd., Mr Johnson Chukwu, said the reduced rate would allow credit flow into the economy.

“The key thing the MPC did is to send a message to the economy that it is ready to adopt a bit of accommodative policy. That is, it is the intention of the CBN that credit should flow to the economy at the same pace.

“That is the primary motivation of reducing the MPR from 13.50 per cent to 12.50 per cent.

“To send a message to economic operators that the intention of the CBN is to have an interest rate environment where customers can borrow at lower rates,” he said.

Dr Jubril Salaudeen, an Islamic Finance professional and Principal Partner, Secure Huda Ltd., said that the reduction meant there would be lesser cash flow into the economy.

“The CBN announced the reduction of the MPR from 13.50% to 12.50%, retains CRR at 27.5% and Liquidity ratio at 30%.

“The immediate implication of this is that lesser cash will flow into the economy through commercial banks’ lending.

“Also this will address to some extent inflation trend occasioned by the COVID-19 and as well reduce the pressure on the naira by slowing down international trade,” he said.

The argument by analysts for a hold decision was premised on the challenge confronting the country as it contends with the dual challenge of the pandemic, which is affecting the economy.

The analysts also noted the collapse of the oil market, which at some point saw the Brent benchmark price dropped as low as under 20 dollars a barrel.


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