‘Why CBN retains base lending rate at 14 pct’

Nigeria’s Monetary Policy Committee (MPC) of Central Bank, CBN on Tuesday voted overwhelmingly to retain all the basic policy parameters.

These include monetary policy rate (MPR) 14.0 percent; cash reserve ratio (CRR) at 22.5 per cent; banks’ liquidity ratio at 30.0 per cent; and also left the asymmetric corridor at +200 and -500 basis points around the MPR.

Reading MPC decisions to reporters, Governor of CBN, Mr Godwin Emefiele “in arriving at its decision, the Committee took note of the gains so far achieved as a result of its earlier decisions; including the stability in the foreign exchange market and the moderate reduction in inflation.

“The option was whether to hold, tighten or ease.

“As in previous meetings, although tightening would help rein in inflation expectations and strengthen the stability in the foreign exchange market, the Committee felt that it would further widen the income gap, depress aggregate demand and adversely affect credit delivery to the private sector.”

According to him, the Committee also noted that tightening may result in the deposit money banks re-pricing their assets and loans, thus raising the cost of borrowing and therefore heightening the already weak investment climate and non-performing loans.

With respect to loosening, the Committee believed that although while it would make it more attractive for Nigerians to acquire assets at cheaper prices, thus increasing their net wealth, and therefore stimulate spending as confidence rises, it nevertheless, felt constrained that loosening at this time would exacerbate inflationary pressures and worsen the exchange rate and inflationary conditions.

The CBN Governor explained that MPC also felt that loosening will further pull the real rate deeper into negative territory as the gap between the nominal interest rate and inflation widens.

“On the argument to hold, the Committee believes that the effects of fiscal policy actions towards stimulating the economy have begun to manifest as evident in the exit of the economy from the fifteen-month recession.

“Although still fragile, the fragility of the growth makes it imperative to allow more time to make appropriate complementary policy decisions to strengthen the recovery.”

In addition, the Committee was of the view that economic activity would become clearer between now and the first quarter of 2018 when growth is expected to have sufficiently strengthened and gains in receding inflation, very obvious.

“The most compelling argument for a hold was to achieve more clarity in the evolution of key macroeconomic indicators including budget implementation, economic recovery, exchange rate, inflation and employment generation.

“In consideration of the headwinds confronting the domestic economy and the uncertainties in the global environment, the Committee decided by a vote of 6 to 1 to retain the Monetary Policy Rate (MPR) at 14.0 per cent alongside all other policy parameters.”

In arriving at this hold, MPC commits to employing maximum flexibility to guide the economy on the path to optimal growth.

“Consequently, six members voted to retain the MPR and all other parameters at their current levels, while one member voted to lower the MPR to signal an ease to the current stance of tight monetary policy.

“However, overall, a majority of the members expressed a strong commitment to policy flexibility that would allow the Committee to promptly take the necessary actions that would promote overall macroeconomic stability and engender sustainable growth.”

The committee, however, warned that in spite of the banking subsector’s resilience, the weak macroeconomic environment has continued to impact negatively on the stability of the sub-sector.

MPC, therefore, reiterated its call on CBN to sustain its surveillance of deposit money banks (DMBs) activities for the purpose of prompt identification and mitigation of potential vulnerabilities.

In addition, it called on the DMBs to support the quest to move the economy forward by extending reasonably low priced credit to the private sector.

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