From Emeka Okoroanyanwu
After a two day meeting in Abuja, the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) last week announced that its monetary policy rates would remain unchanged from the rates set earlier in May 2019. This implies that the Monetary Policy Rate (MPR) will still remain at 13.5 per cent, Cash Reserve Ratio (CRR) at 22.5 per cent and Liquidity Ratio still hanging at 30 per cent.
The decision to keep rates constant, according to the CBN governor, Godwin Emefiele, was to observe the effects of recent policies which the apex bank reeled out in the past one month aimed at stimulating lending to the real sector of the economy.
Some of the policies the CBN hopes would boost the economy include the reduction of MPR from 14 per cent to 13.5 per cent in May 2019, reviewing the impact of the bank’s decision to compel deposit money institutions (DMBs) to retain a minimum lending-to-deposit ratio (LDR) of 60 per cent and asking banks not to charge interest on excess cash balance above two billion naira.
Explaining the rationale for the decision, the governor said that given the happenings in the external sector and the fact that inflation was moderating, tightening the monetary policy should not be an option now. Emefiele said this was based on the conviction that restriction of the capacity of banks to create money could curtail their credit creation capabilities.
READ ALSO: Saudi King Salman’s brother dies at 96
On the contrary, he said the MPC was of the view that while loosening could increase money supply, stimulate aggregate demand and strengthen domestic production, the economy could be filled with liquidity, especially if loosening could drive growth in consumer credit without commensurate adjustment in aggregate output. “It also observed that since interest rates were currently trending downwards, it is safer to await the full impact of these policy actions on the economy before a review of the position of monetary policy,” he added.
He said in considering specific policy options of whether to loosen, tighten or hold, the committee ensured that it focused and considered that the growth of the economy was imperative and the management of price stability was sacrosanct, noting that after evaluating the consequences of loosening or tightening options, the committee decided to hold on its monetary policy’s position.
According to him, tightening policy is not an option at this time, while loosening will increase money supply and stimulate aggregate demand as domestic production and economy will be awash with liquidity.
The governor added that holding on to current monetary policy’s position, the committee observed that the recent action of the management of the bank targeted at stimulating credit growth in the real sector would increase credit delivery to the real sector. He said holding on to its monetary policy would also accelerate development and economic growth in the country.
The CBN governor said that another reason was that interest rates were currently trending downward and it was safer to await the full impact of this policy action on the economy before reviewing its position.
In keeping the rate at 13.5 per cent, CBN is optimistic that its policy rate cut and its LDR instruction will stimulate credit and hence economic growth.
READ ALSO: Real truth about violent herdsmen –Shehu Sani, pro-democracy, rights activist, politician
Analysts are, however, not enthusiastic that the rate cut and other policies of CBN aimed at stimulating lending to the real sector would lead to a surge in lending.
According to analysts at Proshare, the 50 basis points cut in the bank’s policy rate would not lead to a reduction in local lending rates because of some prevailing underlying economic and business risks that have prompted high lending rates.
They believe that the slow 2.01 per cent growth in gross domestic product, GDP, and falling consumer spending would combine to keep manufacturers’ inventories of finished goods high and put upward pressure on holding costs while loss of liquidity would translate into higher finance costs as manufacturers ratio of operating cash flow to interest expense continue to fall. They said manufacturers will find themselves unable to generate adequate operating cash flow to cover short term debt obligations.
In the opinion of the Proshare analysts, the CBN monetary policy stance is unlikely to spur growth as credit expansion will be difficult to achieve in a fragile economy with weak effective consumer spending capacity and major supply-side challenges such as weak local currency that is constantly putting upward pressure on input costs.
They opined that the CBN may need to either allow interest rates stay high and allow credit find its natural level or set a loan-to-deposit ratio (LDR) of 60 per cent and let interest rates respond to relative demand as banks cannot control lending levels and lending rates at the same time.
The analysts are of the view that the risk of repayment default in a slow moving economy will require banks to charge higher rates for borrowing to cover perceived default risk. The higher default risk premium charged on bank lending, they said, would be impervious to policy rate declines while the additional fact of high lending concentration with 100 persons or institutions responsible for over 65 per cent of total domestic bank lending.
