The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to reduce the Monetary Policy Rate (MPR) to 11.5 percent from 12 percent, amid falling growth and rising inflation expectations.
At its meeting in July, the MPC of the Central Bank of Nigeria elected to maintain status quo on traditional monetary policy tools.
Specifically, the committee noted a further cut in Monetary Policy Rate (MPR) may not necessarily lead to a corresponding decrease in market interest rate, considering the current economic challenges.
On the other hand, the MPC said given the structural fallout that necessitated increases in consumer prices, an upward adjustment of the MPR at the time would have further heightened the cost of production which will translate to higher prices of goods and services while an upward increase would contradict the CBN cheaper credit aspirations.
Since the last MPC meeting, key economic data has however revealed the vulnerability of the domestic economy to external shocks and exposed structural issues in the economy.
Economic performance data for Half Year (H1) 2020 contracted 2.18 percent YoY (with Q2 standalone contraction of 6.10% YoY) compared to 2.11 percent YoY growth in H1 19.
Elsewhere, recent upward adjustment in electricity prices and rising PMS/diesel prices due to increasing global crude oil prices are adding more pressure to the inflationary trend over the next couple of months.
Also, due to the limited supply of Foreign Currency FCY and heightened speculation, the BDC-Interbank rate remains elevated despite the resumption of sales to BDC and intervention sales at the IEW.
The monetary policy imperative of striking a balance between supporting the recovery of output growth and reducing unemployment while maintaining stable prices, have been largely challenged by structural issues in the economy.
Nova Merchant Bank notes that any policy that focuses on stimulating credit growth alone without a major revamp of the structural bottlenecks in the economy will do little to provide cheaper credit (even credit in itself) to the growth stimulating sectors of the economy.
“At the end of the meeting, we expect between 100-200bps downward adjustment in the MPR, with such move further adjusting the interest rate on savings account lower to 1.15%-1.05%,” Nova said.