MPC Retains Lending Rate At 11.5%
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has retained the lending rate at 11.5 percent despite the increasing inflationary pressure.
The committee at the end of its two-day deliberation also retained the liquidity ratio at 30 percent and the cash reserve ratio (CRR) at 27.5 percent according to the CBN governor, Godwin Emefiele who said six members voted to maintain all parameters while three voted to increase the MPR.
The MPR is the baseline interest rate in an economy on which every other interest rate used within an economy is built upon
Emefiele explained that increasing the MPR by 50, 75 and 50 basis points respectively, and retaining all parameters constant.
will increase the cost of borrowing and reduce access to credit for businesses which he said might reverse the growth trend of the economy.
The committee had earlier in September 2020 agreed to reduce the benchmark interest rate to 11.5 per cent from 12.5 percent.
At the last MPC meeting for last year, it was decided that the rate and others should be left intact so as to monitor its full impact on the economy, which officially slipped into recession in the third quarter of the year.
The decision is prompted by the views of the members that a hold position tis desirable as it encourages the use of the various intervention mechanisms to deploy liquidity into employment generation and output stimulating sectors of the economy help consolidate the country’s recovery process.
The governor explained that the committee was in dilemma as to whether to continue to focus on efforts to stimulate outputs or whether to focus on reining in inflation, which(at 17.33 per cent) is almost attaining the January 2017 inflation level of 18.72 per cent.
The MPC was worried about the level of unemployment which needed to be addressed swiftly to moderate the restiveness among the populace.
Again, members were generally of the view that given that the exit from recession is fragile, any decision to tighten or rein-in inflation, may reverse the fragile recovery and return the economy into recession.
Emefiele who explained that there is a need to continue to focus on consolidation of the recovery process, by taking those actions that would continue to stimulate output growth, create employment owing that inflation is substantially a supply-side phenomenon, also stated that effort to moderate.
The inflationary pressure; using the current administrative measures being adopted by the Bank in controlling monetary aggregates in the banking system should be in top gear.
“In its consideration of whether to tighten, hold or loosen, therefore, the Committee felt that with inflation at a 3-year high and price stability being the Bank’s core mandate, a contractionary policy stance may be required to tame the rising trend. It nevertheless feels that tightening will hike the cost of capital and hamper investments required to create employment and continue to boost recovery”.
“On the other hand, MPC thinks that whereas loosening would lower rate and improve access to credit which will drive investment, reduce unemployment and stimulate aggregate demand, it feels that loosening will create excess liquidity, which will intensify demand pressure on the foreign exchange market, thereby leading to further depreciation in the currency”.
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