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MPR cut a signal CBN seeks to Prime Economy for Growth

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At the end of its two-day policy meeting, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to reduce Nigeria’s Monetary Policy Rate (MPR) by 100 basis points (bps) to 12.5 percent while leaving other policy parameters unchanged.

This is a sign that the CBN has shifted its focus to stimulating the economy and growth and for now pushed its monetary stability and inflation battle to the background.

The CBN has ample reasons to be concerned. Growth in the first quarter of 2020 while positive was below the level hit in the Fourth Quarter (Q4), 2020.

A coronavirus induced global slowdown and accompanying shutdowns that kicked into full gear towards the end of March, will mean that Q2 GDP numbers will probably print negative.
The rate cut therefore shows the committee’s desire to quicken the country’s recovery from coronavirus-related slowdown and (if possible) avert a technical recession in 2020.

Analysts at Cardinal Stone Partners say that given the MPR’s weak transmission to lending rates in the country (and real sector growth by extension), they expect the CBN to target credit creation through existing administrative/intervention measures.

“The recent promulgations of lower interest rate on intervention facilities (from 9.0% to 5.0%), OMO ban, LDR tweaks, and over N1.0 trillion intervention funding point to a focus on improving money supply with greater pass-through to the real sector.”

According to the MPC, Nigeria’s aggregate lending grew by 8.0% in Q1’20 and this may have been supported by measures like the LDR policy and OMO ban.

Analysts at Nova Merchant Bank note that with the CBN signaling a fast approach to restoring aggregate demand, a more deliberate attempt to soften interbank rates and by extension the lending rate, is expected.

“Given that the reduction of MPR will do little to stimulate credit creation and aggregate demand at this time, we expect the CBN to focus on reflating the banking system through refunds of excess cash reserve ratio CRR and to adopt more efficient measures around the loan to deposit ratio LDR to further support credit creation, especially to consumption stimulating sectors,” Nova Merchant Bank analysts said.

On the inflation front which is often anchored on maintaining currency stability by the CBN, the recent
$3.4 billion IMF facility should provide some level of comfort.

The CBN dollar reserves are up some $3 billion in a month to $36.4 billion as at May 27th.

“The adjustment to the MPR is likely to result in a reduction in cost of funds for Nigerian banks because the interest rate on savings deposit is set at 30.0% of the policy rate. The savings product accounted for 30.5% of total deposit liabilities of Nigerian banks as at November 2019. This suggests that the policy action of the apex bank could provide slight reprieve to the banking sector in the current year,” Cardinal Stone Partners analysts said.

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