CBN takes interest rate to 14%, warns banks
CBN Governor, Mr. Godwin Emefiele
contrary to the expectations of financial
analysts that the Monetary Policy Rate would remain unchanged at 12 per
cent, the Monetary Policy Committee of the Central Bank of Nigeria on
Tuesday hiked the MPR by 200 basis points to 14 per cent.
The 14 per cent MPR announced by the CBN is the highest in over a decade.
However, the committee left the Cash
Reserve Ratio and the liquidity ratio unchanged at 22.5 per cent and 30
per cent, respectively.
The CBN Governor, Mr. Godwin Emefiele,
who announced the decision of the committee after a two-day meeting held
at the apex bank’s headquarters in Abuja, said eight out of the 12
members of the committee attended the meeting.
Out of the eight, he said five members
voted in favour of monetary tightening, while the other three voted to
hold the MPR at 12 per cent.
The MPR is the anchor rate at which the
CBN, in performing its role as the lender of last resort, lends to the
Deposit Money Banks to boost the level of liquidity in the banking
system.
If the apex bank intends to increase the
level of liquidity in the economy, it reduces the MPR but increases it
whenever it desires to tighten money supply.
In taking the decision to increase the
MPR, the CBN governor said the committee was faced with two policy
choices – whether to hold or reduce the rate to stimulate growth, or
increase it in order to curb inflation.
Emefiele, however, said when considered
from the standpoint that the primary mandate of the CBN was to maintain
price stability, the committee decided to focus on its mandate by
checking inflationary pressures.
The governor explained that members of
the committee agreed that the economy was passing through a difficult
phase, adding that the concern was that headline inflation had risen
significantly in June.
He said the June inflation of 16.5 per
cent, which is the highest in 11 years, was approaching twice the upper
limit of the CBN policy reference band.
The committee, he said, noted that
inflation had risen significantly, eroding real purchasing power of
fixed income earners and dragging down growth.
The CBN governor said the high
inflationary trend had culminated in negative real interest rates in the
economy, noting that this was discouraging savings.
According to him, members of the
committee also noted that the negative real interest rates did not
support the recent flexible foreign exchange market as foreign
investors’ attitude had remained lukewarm, showing unwillingness to
bring in new capital under the circumstance.
He said the decision to raise interest
rate would give impetus to improving the liquidity of the foreign
exchange market and the urgent need to deepen the market to ensure
self-sustainability.
The governor said members were of the
opinion that the liquidity of the foreign exchange market would boost
manufacturing and industrial output, thereby stimulating the much needed
growth.
He stated, “The MPC was further
concerned that while the situation called for obvious tightening of the
monetary policy stance, the technical recession confronting the economy
and the prospects of negative growth to year-end needed to be factored
into the policy parameters.
“The arguments in favour of growth were anchored on the premise that the current inflationary episode was largely structural.”
“Members called on the Federal
Government to fast-track the implementation of the 2016 budget in order
to stimulate economic activity to bridge the output gap and create
employment,” he added.
When asked about the state of Nigerian
banking system, the governor maintained that the industry remained
strong and that there was no need for depositors to panic.
He said the fact that the management team of a bank was removed by the CBN did not mean that the lender was in distress.
Such an action, he noted, would always
be taken to protect depositors’ funds when there were infractions of
rules and regulation.
Emefiele further stated that since
2009, the CBN has come out to say boldly that no depositor of a Nigerian
bank will lose their deposit and we stood by that to the extent that
the CBN even issued guarantees in favour of any depositor and those
guarantees have indeed not crystallised since 2010.”
On the bank’s assessment of the new
foreign exchange policy, Emefiele said, “It has been excellent so far
given that we had a 16-month period of no activity in the foreign
exchange market.
“I will say that the results have been
good with a few activities that we are not too happy about, but we feel
that in the course of time, because it is just one month since this
started, there is a lot of room for improvement.”
However, financial analysts faulted the
decision of the MPC to increase the benchmark lending rate from 12 per
cent to 14 per cent, adding that the decision would not result in the
CBN’s objective of checking inflationary pressure.
The Head, Department of Banking and
Finance, Nasarawa State University, Keffi, Uche Uwaleke, said the
banking sector would be worst hit by the latest decision of the CBN.
He said, “In my view, the outcome of the
MPC meeting inspires little prospects for early economic recovery. I
had expected some easing of the monetary policy or at worst an unchanged
MPR in view of the slump in the Gross Domestic Product.
“With the benchmark rate jumping from 12
per cent to 14 per cent, the CBN has clearly chosen to focus on
inflation rather than growth. Unfortunately, this approach will most
likely miss the target. The banks will be the worst hit as increase in
the MPR will automatically lead to another squeeze within the system.”
The President, Time Economics Limited,
Dr. Ogho Okiti, said while the tightening of the MPR would reduce
negative real interest rate as well as stabilise the naira, it would not
check the current level of inflation.
A Professor of Economics at the Olabisi
Onabanjo University, Sherriffdeen Tella, said, “It is an unfortunate
decision. When you have prices going up, what you should do is to find a
way to reduce the interest rate, and not to increase it; more so, when
you know that there is already a liquidity crisis in the country.
“This decision by the MPC cannot reduce inflation, we will continue to grapple with higher interest rates.”
The Chief Executive Officer, Economic
Associates, Dr, Ayo Teriba, said the decision showed that the MPC was
not sensitive to the plight of Nigerians.
He said, “At a time that the country is
on the brink of recession, it is expected that the CBN will support
economic recovery by easing the monetary policy. The CBN has been
maintaining a tight monetary policy and I believe this may have partly
contributed to the situation we are in today. The MPC is not sensitive
to the economic situation of Nigerians. I believe this hike will worsen
economic recession.
“They should have reduced the MPR and
the CRR to provide support for economic recovery. The decision shows
that the monetary policy is disconnected from the people.”
Speaking in the same vein, the Chief
Executive Officer, Cowry Assets Management Limited, Mr. Johnson Chukwu,
stated, “The inflationary pressure we are experiencing is caused by
cost-push inflation, that is, foreign exchange-related problems and
increase in energy costs and the rest. It is not as a result of excess
liquidity in the system. So, you cannot say you want to reduce liquidity
in the system to fight it.”
The Managing Director, Financial
Derivatives Company Limited, Mr. Bismarck Rewane, said the decision
would lead to increase in borrowing cost for the Small and Medium-scale
Enterprises and that the general economic situation would be very tough
over the next few months.
He, however, said the MPC decision was a tactical move to attract the much-needed foreign capital into the economy.
The Chief Executive Officer, Renaissance
Capital, a United Kingdom-based investment bank, Mr. Temi Popoola, said
the decision is highly welcomed by his firm as it would help the CBN to solve the
biggest problem of attracting dollars into the economy.
“Today, it appears the biggest challenge
before the CBN is how to attract dollars into the economy; and we feel
that the decision by the MPC is a good step in that direction,” he
stated.
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