contrary to expectations that the Monetary Policy Committee (MPC) decision to reduce the Monetary Policy Rate (MPR) by 100 basis points to 11.5 per cent will boost credit growth in the domestic economy, inestment experts at the weekend said the policy outcome may indeed not lead to any significant growth in domestic credit and aggregate demand.
Those who spoke to Daily Sun, said the MPC needs to address the issue of the exchange rate, and forex illiquidity, the two major hindrances to meaningful economic recovery in the country. The Monetary Policy Committee of the Central Bank of Nigeria (CBN) had in a surprise move lat Tuesday reduced the MPR by 100 basis points to 11.5 per cent – the third rate cut in 2020, with the asymmetric corridor around the MPR also adjusted to +100 basis points/-700 basis points from +200 basis points while other parameters remained constant.
Chairman of the MPC and CBN Governor, Godwin Emefiele, stated that in reaching the decision, the Committee considered a range of policy options, adding that it had noted that a tight policy stance could affect economic recovery.
Emefiele also observed that keeping policy parameters unchanged would allow the economy to adjust to the stimulus measures introduced by monetary and fiscal authorities, allowing the Committee more time to assess the impact on the economy.
But commenting on the policy stance, analysts at Cordros Capital in an emailed research note to Daily Sun, said the decision firmly established the CBN’s dovish stance as it continued on its quest to push more credit to the private sector.
“We do not expect any significant growth in domestic credit or aggregate demand, especially given the historical ineffectiveness of the MPR in stimulating output and as banks remain concerned about extending credit amidst the fragile macroeconomic conditions. In our view, the MPC needs to address the issue of the exchange rate, and forex illiquidity, which in our view, are major hindrances to any meaningful economic recovery”, the research and investment based firm said.
Commenting further, Analysts at Afrinvest, said, the decision of the MPC remains consistent with the apex bank’s pro-growth stance and the drive to encourage lending.
According to them, this has assumed a significant dimension especially as economic growth plunged to -6.1 per cent y/y in Q2:2020, the worst on record.
“The adjustment of the asymmetric corridor, which means that deposit rate with the CBN will fall to 4.5 per cent and lending rate will rise to 12.5 per cent also supports this growth drive. However, we believe the priority of the MPC should be in line with its core objective of price stability given that inflation rate was 13.2 per cent in August, above the Bank’s 6-9 per cent target and the highest in 29 months.
While the Committee cited that non-monetary factors have driven the increase in inflation as money supply growth has been contained, we believe recent and existing FX restrictions around food imports have been a big factor. This is even more significant given issues such as disruptions to the agriculture value chain, insecurity and weather challenges that are likely to lead to more food price pressures.
We are not convinced that expanding credit would resolve both the structural factors and current trade barriers and not worsen the trend in consumer prices. The transmission of the MPR to lending rates is also not strong while existing yields in the debt market would suggest a strong easing stance already. With these reasons, we are not optimistic that a rate cut would support the MPC’s growth objective”, they said.