With the retention of the monetary policy rate at 14 per cent, the economy will continue to slide in spite of government’s efforts to stimulate it.
After its recent meeting in Abuja, the Monetary Policy Committee (MPC) retained the 14 per cent Monetary Policy Rate (MPR). It also retained all monetary parameters, despite calls to reduce the MPR, which is the rate at which CBN lends money to Deposit Money Banks. The committee also retained Cash Reserve Ratio (CRR) at 22.5 percent and the Liquidity Ratio at 30 percent, among others. While we do not see any reason for the committee to still hold on to the 14 per cent monetary policy rate for the 12th consecutive time since July, 2016, we welcome the MPC advice to the Federal Government to save for the “rainy day.”
As usual, the CBN Governor, Mr. Godwin Emefiele, defended all the decisions taken at the two-day meeting.
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He explained that seven of the 10 members of MPC voted in favour of the retention of the lending rate at 14 per cent, while two members voted for a reduction and one member voted for a hike in the policy rate. The CBN boss also said that the committee considered the tightening of interest rate with the belief that such measure would curtail the threat of a rise in inflation.
Emefiele also noted that notwithstanding the deceleration in headline inflation, the current double-digit inflation remains above the apex bank’s six to nine per cent target. According to him, the MPC believed that tightening the interest rate will stem the tide of capital flow reversal in the face of sustained monetary policy nominalisation in some advanced economies. The decision, he said, would “rein in inflationary pressure and moderate inflation rate to single digit levels, increase real interest rate, build investors confidence and further stabilise the country’s exchange rate.” This decision, he stressed, was taken considering the potential effect of stimulating aggregate demand through lower cost of capital.
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The CBN’s argument for maintaining the current policy is the same argument it advanced in the last two years, even when both headline and core inflation rates had been on a downward trend. In fact, that argument is no longer persuasive. At present, the inflation rate is 11.23 per cent, according to figures released by the National Bureau of Statistics (NBS). With the retention of the monetary policy rate at 14 per cent, the economy will continue to slide in spite of government’s efforts to stimulate it. Nigeria has one of the highest interest rates in the world. Britain, Australia, Canada and
the United States have lending rates of less than 2 per cent. Perhaps, this can explain why the Minister of Finance, Mrs. Kemi Adeosun, in 2016, urged the CBN to lower the interest rate to enable government and private sector operators to borrow at economically viable rates that could reflate the economy and jumpstart growth. Unfortunately, her advice was rebuffed.
Now, many Small and Medium Enterprises (SMEs) are facing tough times because of high interest rates. Even access to CBN’s intervention fund for small businesses is not easy because of hike in interest rates and other stringent conditions imposed by commercial banks. Despite the refusal of the monetary authority to heed the call to bring down lending rates, we give it credit for advising the government to save for the future. The recent rise in crude oil prices in the international market and the increase in allocations from the Federation Account Allocation Committee (FAAC), make strong case for saving.
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We recall that a similar advice by the then Finance Minister, Dr. Ngozi Okonjo-Iweala, some years ago, was not heeded. Rather than save, the government succumbed to the pressure from the state governors and shared the money.
Although the Federal Government set up the Sovereign Wealth Fund (SWF) in 2011 with a seed capital of N150billion for budgetary stability, the total savings in the fund as at May 2018 is said to be too little for the “rainy day.” Government should be prudent and save.
At the same time, the CBN should substantially reduce the lending rate. Without it, access to borrowing, which will stimulate the economy, is likely to be hampered. The current lending rate is a disincentive to business and job creation.
