CBN cuts interest rate, two years after retaining 14% – Independent Observers

CBN cuts interest rate, two years after retaining 14%

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By Kunle Adedoyin

The Central Bank of Nigeria (CBN) has reduced the monetary policy rate (MPR) by 50 basis points from 14% to 13.5%.
Godwin Emefiele, the CBN governor, said this decision taken by at its monetary policy committee meeting on Tuesday underscores the need to signal a new direction which would be “pro-growth”.
He said the reduction would manage investor sentiments in terms of capital inflows.
The monetary policy rate (MPR) is a critical benchmark interest rate in an economy, which determines other interest rates used within an economy is built on the MPR.
The committee, which holds a meeting once in three months, first set the benchmark interest rate at 14% in July 2016, when country was in a recession, to combat inflation and improve investor attitudes towards bringing in new capital.
At its January 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”.
“It will also worsen the position of non-performing loans of the banks. The Committee also felt that tightening would dampen investments and hamper improvements in output growth, given the already fragile growth performance so far achieved.”
At that time, the committee had said it wanted to watch the macroeconomic performance after the general election.
Since President Muhammadu Buhari won his re-election bid, experts were of the opinion that investors could be sure of continuity in economic policies.
However, there are conflicting reaction to the reduction of the MPR. While some believe it is a welcome development as it would likely impact positively on the cost of capital in the economy, others believe that the recent improvement recorded in the inflation, exchange and interest rates does not justify a reduction in MPR.
Yusuf Muda, Director General of Lagos Chamber of Commerce and Industry, said it is a welcome development if the commercial banks will reciprocate by reducing lending rates, including those of existing loans.
But some analysts at FSDH Resarch disagree.
“The temporary stability in key indicators from January 2019 till 21 March 2019 may support an argument for monetary policy easing (reduction in interest rate and other measures that can push more money into the financial system).
“Adding to the debate supporting the easing of monetary policy is the fact that the general election is now behind us, so the negative impact of electioneering spending on price stability and associated uncertainties surrounding the election may be over. However, FSDH Research believes the short-term outlook of the Nigerian economy justies a hold decision on policy rates at the current levels.”

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