In a surprise move signalling the retention of its tight monetary stance, the Central Bank of Nigeria (CBN) raised its benchmark interest rate from 11 per cent to 12 per cent to tackle inflation, which rose sharply to 11.3 per cent double digit last February.
The Monetary Policy Committee (MPC), according to the CBN Governor, Mr. Godwin Emefiele, who briefed the press in Abuja yesterday, also raised the cash reserve ratio (CRR) for commercial banks to 22.5 per cent from 20 per cent. It, however, left the liquidity ratio unchanged at 30 per cent.
The fresh hike in the Monetary Policy Rate (MPR) is coming four months after MPC approved a low interest rate of 11 per cent at its November 2015 meeting. These measures are expected to reduce the quantity of naira in the system and free up dollar supply. The MPR, which is also known as the banking watchdog’s benchmark interest rate, is the nominal anchor of all interest rates in the economy. It is the rate at which the CBN gives loans to banks and, as such, directly influences the level and direction of change in interest rates.
The CRR is the proportion of banks’ total deposits held in cash balance with the CBN. This will automatically reduce the cash disposable by banks for lending to fund the foreign exchange (forex) market that has been under intense pressure.
The increase in MPR means depositors will get higher interest on their deposits, which the banks will pass on to corporate borrowers, who will also pass it to consumers. Yields on bonds will also rise. And since the government is the major borrower through the purchase of bonds for cash, it means that the government will pay more for its local debt – thus raising the cost of borrowing and that of firms in the bond market. While calling for quick passage of the 2016 budget to jump-start growth, Emefiele called for policy synergy between fiscal and monetary authority to reinvigorate the economy.
He said the apex bank would keep the naira foreign exchange rate stable despite a sharp fall of the currency on the parallel market due to shortages of dollars. Nigeria, Africa’s biggest economy and the continent’s top oil producer, is going through its worst economic crisis in years due to the sharp drop in crude prices. The oil sector accounts for around 70 per cent of national income.
The CBN governor noted that the apex bank had adopted accommodative monetary policy since July 2015 in the hope of addressing growth concerns in the economy by freeing up more funds for lenders by lowering both CRR and MPR, with excess liquidity arising from the lower CRR warehoused at the CBN.
He said: “DMBs were to access these funds by submitting verifiable investment proposals in the real sector of the economy. The funds have not impacted the market yet because the CBN was still processing some of the proposals submitted by the DMBs. In the first episode of easing which resulted in injecting liquidity into the banking system, DMBs did not grant credit as envisaged.
Moreover, the delay in passage of the 2016 Budget has further accentuated the difficult financial condition of economic agents as output continues to decline due to low investment arising from weak demand.” He said the cautious approach to lending by the banking system underpinned by a strict regulatory regime conditioned by the Basel Committee in the post global financial crisis era, has further alienated investors from access to credit as banks prefer to build liquidity profiles in anticipation of government borrowing.
The governor said the committee took special note of the weakening macroeconomic environment reflected particularly in foreign exchange shortages, slowing Gross Domestic Product (GDP) growth rate and rising inflation.
Emefiele said: “Overall economic growth slowed significantly in 2015, particularly in Q4. Apparently, the conditions responsible for the slowdown – uncertainty around fiscal policy, adverse external environment, security challenges in some parts of the country affecting production and distribution of agricultural produce, low electricity supply, fuel shortages, and sluggish growth in credit to the private sector – have continued in the first quarter of 2016. “On the monetary front, contrary to the notion of liquidity overhang in the financial system, the wider economy appears starved of the needed liquidity to spur growth and employment.
Recent performance of the monetary aggregates lends credence to this fact. With the exception of credit to government, growth in all the monetary aggregates remained largely below their indicative benchmarks, yet; headline inflation spiked to 11.38 per cent in February 2016, substantially breaching the policy reference band of 6 – 9 per cent.” On policy synergy between fiscal and monetary authorities, he acknowledged that both the CBN and the Finance Ministry have been meeting and talking regarding the direction of the economy.
He, however, noted: “Regrettably, the challenges that face us at this time is not just peculiar to Nigeria. It is a challenge that currently confronts practically all economies in the world whether you are a commodity-exporting country or not; and we have been discussing and I am very sure that in due course, some of the deliberations at the economic team meeting will be unfolded by way of a document in due course and it will be released to the public.” The governor debunked the allegation that the bank had given directive for conversion of $20 billion in domiciliary account into naira.
