MPC Slashes Lending Rate To 12.5% To Check Recession
ISMAIL MUSA and AMINA HUSSAINI, Abuja
The Monetary Policy Committee (MPC) Thursday announced a further reduction by 100bps to 12.5 percent on the Monetary Policy Rate (MPR) to prevent the economy from sliding into recession
The committee had March 26, 2019, reduced the monetary policy rate by 50 basis points, from 14 percent to 13.5 percent.
At its latest meeting, however, the committee was faced with the choice of reducing or leaving policy parameters unchanged and unanimously elected to reduce the benchmark interest rate. Notably, seven members voted to cut rate by 100bps, two members voted for a 150bps rate cut, while one member elected for a 200bps rate cut.
The committee adopted monetary policy easing as leading to the reduction by 100bps, while asymmetric corridor around the MPR stood at +200/-500bps; Cash Reserves Ratio (CRR) was elected to remain at 27.5 percent, while Liquidity Ratio (LR) was maintained at 30.0 percent.
The Committee came to this position having considered developments in the global and domestic economy including the negative impact of COVID-19 on global growth and the dovish global central banks’ responses to the COVID-19
On the domestic front, the Committee noted amongst others, sustained inflationary pressure which rose in April by +8bps to 12.34 percent y/y) and also the weaker but still positive output growth in Q1-20, and also, the sustained decline in manufacturing Purchasing Managers Index (PMI).
The committee acknowledged that declining growth recorded in Q1 2020, will slide into the negative territory in Q2-20. However, in a bid to avoid an economic recession over 2020, the MPC elected to support an already dovish policy landscape with a 100bps rate cut.
At its earlier 2019 meeting, the committee had said that the chances of loosening were remote although it said tightening would “result in the loss of the gains so far achieved”.
Governor, CBN, Godwin Emefiele stated that the decision was a balance of the three options reviewed between supporting the recovery of output growth while maintaining stable price development across inflation.
“The exchange rate and market interest rates. To this end, the Committee noted that the Cash Reserve Requirement (CRR) was recently adjusted upwards as a means of tightening the stance of policy.
Noting that the bank in its response to COVID-19 pandemic, reduced interest rates on all CBN interventions from nine to five percent and noted that “Increasing MPR at this stage will be counter-intuitive and it will result in upward pressure on retail market rates”.
The CBN boss explained that: “The Committee maintained that although a sharp decline in output growth is expected in Q2 2020 and maybe in the third quarter also, if the current stimulus initiatives are properly implemented, the economy would reverse to positive growth by the fourth quarter.
“Hence the optimism on the part of the Committee that the economy may not slide into recession”.
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