People & Money

CBN Retains Key Lending Rate After Facing Policy ‘Dilemma’

The Monetary Policy Committee (MPC) of Nigeria’s central bank on Tuesday decided to retain its Monetary Policy Rate (MPR) at 11.5 percent, citing a more pressing concern of inflation.

The decision to retain the key interest rate at the committee’s first meeting of 2021 was widely anticipated by analysts, many of which expected key monetary policy parameters to be left unchanged due to rising inflationary pressure.

MPR was left constant at 11.5%, similar to other parameters such as Cash Reserve Ratio (CRR), Liquidity ratio, and asymmetric corridor, which remain at 27.5%, 30%, and +100/-700 basis points around the MPR respectively.

The disclosure was made by Godwin Emefiele, Governor of the Central Bank of Nigeria (CBN) while reading the communique at the end of the meeting.

Tough choice

Going into the two-day meeting, the apex bank faced the tough choice of striking a balance between supporting economic growth amid a pandemic-triggered recession and curbing spiralling inflation, which a rates cut would only have worsened.

Also Read: CBN Slashes Monetary Policy Rate to 11.5%

“The MPC was faced with a policy dilemma ahead of this meeting as both price stability and economic stability objectives have to be met,” notes Abiodun Oyelakin, an investment banking Analyst at Lagos-based Greenwich Merchant Bank. “Recall that Inflation recently hit a 3-year high… and the economy is currently in recession with Q3’2020 GDP growing at -3.62%.”

All through 2020, Nigeria’s central bank, like several of its counterparts across the world, chose to stimulate economic growth over curbing inflation. The MPC embraced a looser monetary policy stance and lowering of interest rates to spur economic activity as Africa’s largest economy faced the heat of the novel coronavirus pandemic.

But inflation figures have continued to soar, reaching a three-month high of posting 15.75% in December 2020, according to official data from the National Bureau of Statistics (NBS), and further defying the CBN’s desired goal of keeping it at a single digit. It is that very objective that drove the MPC to tighten its current position, according to analysts.

“The committee had to strike a balance between supporting economic growth and curbing rising inflation,” said Michael Ohens, a financial analyst. “Cutting the rates would have been justified by the need for the bank to support economic recovery efforts of the government. But then, there is the pressing need to stabilize the exchange rate and tackle the skyrocketing inflation, which favour tightening monetary policy.”

An economist at a top consulting firm added that the decision to maintain the monetary status quo is essentially about putting inflationary pressures under control as “a tightening stance is more appropriate to stem rising prices.” But he warns that the move could be “detrimental to credit growth especially to the real sector, except, of course, we expect the CBN to deploy other monetary tools to limit the impact.”

Also Read: Nigeria’s Inflation Rate Reaches 14.23 Percent in October, Above CBN Forecast

Meanwhile, Nigeria continues to battle surging cases of the Covid-19 pandemic. As of Monday, January 25, Nigeria had recorded 112,996 confirmed cases of the virus with more than 1,500 deaths.

Infections have skyrocketed in the country over the past few weeks and four cases of the more infections coronavirus variant found in the UK have been reported in Nigeria but the CBN has warned against going into another lockdown, saying this would worsen the current economic situation.

On other fronts, Nigeria is faced with heightening inflationary pressure, insecurity challenges, foreign exchange market strains, and the decline in the purchasing managers’ index, a monthly measure of sentiment in the manufacturing sector.

Analysts are of the opinion that it will take a while for growth to return to its pre-pandemic levels but a low base effect and an expected pick-up in the non-oil sector bodes well for the economy.

Related Articles

Back to top button