• Fri. Sep 29th, 2023

Why CBN raised lending rate to 13%, retain other policy parameters

ByBassey Udo

May 24, 2022

By Bassey Udo

The Central Bank of Nigeria (CBN) said its Monetary Policy Committee (MPC) decided to raise the lending rate in the economy to rein in spiraling inflation threatening the fragile recovery of the economy from the impact of COVID-19 pandemic.

Amid declining global economic growth and heightened uncertainties, the MPC raised the monetary policy rate (MPR) to 13 percent.

The revised rate was by about 150 basis points, from 11.5 percent, the first time since September 2020 when the apex bank intervened at the peak of the drastic squeeze by the global economic crisis and the devastation of COVID-19 pandemic, to make lending affordable to small businesses.

At the end of the two-day meeting of the MPC in Abuja on Tuesday, its Chairman and CBN governor, Godwin Emefiele, said despite the upwards adjustment of the MPR, all other policy parameters were retained.

In his post-MPC media briefing, Emefiele told reporters members of the committee resolved to retain the asymmetric corridor at +100/-700 basis points around the MPR; cash reserve ratio (CRR) at 27.5 percent, and liquidity ratio at 30 percent.

MPR is the benchmark interest rate approved by the apex bank for lending to commercial banks against which other lending rates in the economy are pegged to moderate inflation.

CRR represents the share of a bank’s total deposit allowed by the CBN as cash reserves, while liquidity ratio measures a bank’s capacity to meet its debt obligations and its margin of safety and solvency.

In May 2020, at the peak of the pandemic, when crude oil price at the international market crashed to less than zero, the CBN, after retaining the rate for 15 consecutive times since March 2019, adjusted the MPR from 13 percent to 12.5 percent, to make borrowing from banks more affordable for businesses.

In September 2020, the MPR was further reduced by another 100 basis points to 11.5 percent, a level retained, along with other key monetary policy parameters, till the latest adjustment.

Giving the rational for the adjustment, Emefiele said the MPC reviewed the broad outlook for the global and domestic economies in the medium-
term, to reveal that both were still beclouded with uncertainties.

He said the Committee traced the uncertainties in the global scene to the lingering war between Russia and Ukraine, the fallout from the extensive sanctions against Russia by several countries and the impact of the continued spread
of the COVID-19 Pandemic in China.

The global economic growth, the CBN governor noted, was being affect by significant headwinds threatening to further derail current projections in the economy.

Besides, he said the spiralling inflation in the economy, which rose by almost 90 basis points in April, 2022 to 16.82 percent in April 2022, from 15.92 percent in March 2022,was undermining the recovery of output growth, due to the associated build-up of
uncertainties around the cost of inventory and other production inputs.

Also, the rise in global debt, the Emefiele noted, was also posing a huge dilemma to policy makers on how to avert a near-term global financial crisis.

Although the MPC acknowledged the resilience of the global aggregate demand, Emefiele said the supply-side constraints were seen as capable of undermining the recovery efforts in
the short to medium term, with domestic prices likely to continue rising due to increased spending associated with the forthcoming 2023 general elections.

During the MPC meeting, Emefiele said members noted that despite the impact of the post-pandemic intervention policies in support of economic recovery, the steep rise in inflation across both the advanced and emerging market economies generated growing concerns amongst central banks, as the continued rise in inflation was exerting unsustainable pressures on price levels.

Besides, the impact of the Russia and Ukraine conflict, the MPC noted, resulted in significant disruption of the global supply chains, amid the negative impact of the COVID-19 pandemic in China.

Although the MPC said the domestic economy remained on a steady recovery path for six
consecutive quarters, with the National Bureau of Statistics (NBS) reporting the country’s gross domestic product (GDP) growth by 3.11 percent in the first quarter of 2022 (year-on-year), real GDP growth moderated slightly, from 11.07 percent in the previous quarter and 9.36 percent (quarter-on-quarter).

The MPC said the decision to raise the controlling lending rate was to move away from its cautious approach on interest rate managemenr, to dampen the expectation of the inflationary pressures.
Besides, the Committee said this would still allow it adopt an accommodative approach to development finance initiatives to support the growth of the economy and sustained recovery.

While the Committee expresed conviction that the development finance initiatives of the apex bank should remain at 5 percent till March, 2023, it said further loosening of the lending rate in the face of the rising policy rates in advanced economies may result in a sharp rise in capital outflow and faster dry-up of foreign credit lines.

Besides, MPC held the view that loosening could lead to further liquidity squeeze and inflationary pressure.

Consequently, the CBN governor said the MPC was of the view that a decision to hold rate unchanged at this time would
strengthen the perception that the CBN has abandoned its primary mandate of reining in inflation to stabilise the economy.

On the need to tighten, Emefiele said the MPC felt tightening would help moderate the inflationary trade-off from the steady growth recovery so far, and help to rein in inflation before it assumes a galloping trend.

Again, the Committee said tightening would narrow the negative real interest
rate margin, improve market sentiments and restore investor confidence in the economy.

In other words, Emefiele said the MPC believed tightening would moderate inflationary pressure
pass-through to exchange rate depreciation and moderate the speed of capital flow reversal, provide incentives for foreign capital inflows and sustain

In addition, the Committee was of the view that tightening the rate could moderate government domestic borrowing, as government debt servicing to revenue ratio has spiked
significantly in recent times, threatening debt sustainability.

“The Committee noted that the current rise in inflation may be inimical to economic growth, and thus hinder the full recovery of the economy,” Emefiele said.

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