CBN’s MPC retains benchmark interest rate at 14%

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), which has just concluded its two-day meeting today, voted to retain the benchmark interest rate, the monetary policy rate (MPR), at 14 per cent with the asymmetric corridor around the MPR also maintained at +200 bps and -500 basis points.

The apex bank also retained the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) at 22.5 per cent and 30 per cent respectively.

The CBN Governor, Mr. Godwin Emefiele, said that 10 members of the committee agreed to maintain the existing monetary policy decisions after evaluating the global and domestic macroeconomic and financial developments in the first eight months of 2016 and the outlook for the year.

The apex bank’s decision was in line with the position of most analysts who had said the apex bank faced a tough choice of “do nothing”. However, the decision is contrary to the clamour by the government and a large segment of the populace for reduction in interest rate to boost domestic production.

Most corporate finance and economic think-tanks had said the current macroeconomic situation presented tough choices for the apex bank, which decisions determine the underlying mechanisms for key macroeconomic indicators like inflation, interest rate, foreign exchange rate and capital flow among others.

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According to pundits, the apex bank’s Monetary Policy Committee (MPC) faced tough choices to ease monetary policy in response to growth slowdown and widening output gap; maintain status quo while reinstating the need to fully implement the currency market reforms to regain credibility and push for fiscal-monetary policy coordination to implement structural reforms and hike rate further to conform with recently guided inflation-targeting thrust and further attract portfolio capital inflows.

“The current economic recession does not support an increase in rates; rather it supports rate cut to boost output. On the other hand, the rising inflation rate and weak currency do not support rate cut but a rate increase. However, given the stagflation the country faces at the moment, maintaining rates at the current level may be the best option,” FSDH Merchant Bank stated in a preview.

According to pundits at FSDH Merchant Bank, the weak global economic growth outlook portends a downward pressure on oil prices, which will mean additional pressure on the value of the Naira. Thus, a tight monetary policy is an appropriate response to mitigate the negative impact on the Nigerian economy.

Analysts however noted that the Nigerian economy needs policies to stimulate it with appropriate fiscal measures urging government at all levels to borrow to pay salaries of workers and to also partner with the private sector to develop real estates and other key infrastructure. These measures will inject liquidity into the system and provide jobs while government also needs to partner with banks to enable civil servants have access to loans to boost their spending power.

“We do not expect the MPC to raise rates higher to combat inflationary pressure because of economic growth concern. Looking at the economic developments in the country, we believe the MPC will vote to maintain rates at the current levels. The need to stimulate economic growth in Nigeria does not support a rate hike.

“Meanwhile, the need to tame the rising inflation rate also does not support a rate cut. The most appropriate policy option is to do nothing,” FSDH Merchant Bank noted.