Emeka Okoroanyanwu
In a surprise move last week, the Monetary Policy Committee (MPC) slashed the monetary policy rate (MPR) by 50 basis points to 13.5 per cent per annum from the 14 per cent it had hovered for about 33 months or 16 consecutive sessions. Of the 11 members present at the meeting, 10 voted to leave all other monetary parameters unchanged, while one was in favour of a cut in the cash reserve ratio (CRR) by 100bps.
MPR is the rate at which banks borrow money from the central bank. The MPR in one way or the other influences the rate at which banks lend money to their customers. The higher the rate, the higher interest rates banks charge their customers.
The decision to reduce the MPR analysts predict is essentially to reduce cost of government borrowing, a critical determinant of the level of fiscal stability. At present, lending rates are hovering around 21 per cent to 22 per cent per annum and with the reduction in MPR, the rates are likely to come down slightly to between 18 to 21 per cent in the near future.
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However, the decision to leave the Cash Reserve Ratio (CRR) at 22.5 per cent coupled with aggressive Open Market Operations (OMO) auctions means that the supply of money will be fixed and the interest rate inelastic nature of supply of credit will remain unchanged.
This means that the initial euphoria that the rate cut would engender credit growth to the real sector may not materialise after all. Thus, reducing CRR and increasing money supply is expected to have a greater impact on the price and availability of credit. This, of course may not be the case in an economy that is import dependent and buffeted by inflation.
In announcing the rate cut last week, Central Bank of Nigeria (CBN) governor, Godwin Emefiele said it was aimed at supporting the country’s economic growth, reduce unemployment and diversify the economy while also having a fresh focus on monetary tightening.
He allayed fears that the rate cut would trigger inflation or put pressure on the already weak naira.
Analysts have greeted the MPC move with mixed reactions. While some say it was capable of instigating growth in the economy as more credit would flow to the critical sectors others said it was a token that came too late and may not make any appreciable impact in the economy.
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Managing Director of Financial Derivatives Company Limited, Mr Bismarck Rewane, said, “It is a positive move at this time but it needs to be complemented with other measures. So, its initial impact is not going to be significant. They should have done this a year ago, if not two years ago.
“They have to reduce the CRR because people are not going to lend because the MPR has come down. Loans and credit have become price-inelastic. The whole idea of anticipated inflation versus historical inflation has not been addressed.”
Professor Sheriffdeen Tella of Olabisi Onabanjo University, Ago Iwoye described the MPR reduction as too low, saying, “it won’t have any effect because the economy is still very harsh, and it cannot bring about any significant change or engender industrial growth.”