CBN Retains Monetary Policy Rate, MPR At 14 Percent

Says interest rates unchanged was informed by the need to continue to attract FDI's

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The Central Bank of Nigeria (CBN) on Tuesday says it is retaining the Monetary Policy Rate (MPR), a benchmark for lending by banks at 14 percent.

The CBN Governor, Mr Godwin Emefiele announced the decision at the end of the 114th meeting of the Monetary Policy Committee, MPC in Abuja.

According to Mr. Emefiele the six members of the committee agreed to maintain the current monetary policy stance, even though two members voted to ease monetary policy rate.

REASONS BEHIND APEX BANK DECISION

He says the decision to leave the interest rates unchanged was informed by the need to continue to attract foreign investment inflow to support the foreign exchange market, and to promote economic activity.

Although the CBN governor posits that low-interest rate was necessary, to make it easy for businesses to borrow at low-interest rates and for easy injection of liquidity into the financial system, the MPC resolved to keep the rate at 14 per cent, to help reverse the inflationary trend in the economy.

He says apart from the MPR which was retained at 14 per cent, the committee also retained the Cash Reserves Ratio at 22.5 per cent.

Also retained are the Liquidity Ratio which was left at 30 per cent; and the Asymmetric Window which was left at +200 and -500 basis points around the MPR.

“MPC decided to retain MPR at 14 per cent, retain CRR at 22.5 per cent, retain the liquidity ratio at 30per cent, retain assymetric corridor at +200 and -500 bases point around the monetary policy rate.’’

He says the MPR was not eased at this time because it would signal the committees’ sensitivity to growth and employment concern by encouraging the flow of credit to the real economy.

“The MPC noted the liquidity suffering in the banking system and continuous weakness in financial intermediation.

“It agreed on the need to support growth without jeopardising price stability or offsetting other recovering macroeconomic indicators, particularly the relative stability in the Foreign Exchange (Forex) market.

“The MPC thinks that easing at this point will signal the committee’s sensitivity to growth and employment concern by encouraging the flow of credit to the real economy.

“It observed that easing at this time will reduce the cost of debt service which is actually crowding out government expenditure.

“Also, the risk to easing will further pull the real interest rate down into negative territory,’’ he posits.

Emefiele posits that the argument for holding was to ensure workability of the past policies in the economy.

MPC, he says factored that the high banking system liquidity level, the need to continue to attract foreign investment inflow to support the forex market and economic activity would cause a jump in the system liquidity.

According to him, the expansive outlook for fiscal policy in the rest of the year and the prospective election related spending will also cause a jump in the system liquidity among other things.

CONCERNS ON FISCAL DEFICIT

The governor says the committee expressed concerns about the rising fiscal deficit currently at about N2.51 trillion in the first half of 2017 and the pressure on high government borrowing.

Urging fiscal restraint to check the growing deficit, the CBN governor says the MPC supported government’s proposed issuance of sovereign-backed promissory notes of about N3.4 trillion for the settlement of accumulated local debt and contractors’ arrears.

The Committee, however, urges caution in monitoring the release of the promissory notes to avoid excessive injection of liquidity into the system, which is capable of removing the gains so far achieved in inflation and exchange rate stability.

Emefiele notes that in spite of the resilience of the banking sector, the prolonged weak macroeconomic environment had continued to impact negatively on stability of the sector.

He reiterates MPC’s call on the bank to sustain its intensive surveillance of the Deposit Money Bank (DMB) activities for the purpose of promptly identifying and addressing vulnerabilities.

The CBN boss also called on DMB to support economic recovery growth by extending reasonably price credit to the private sector.

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