CBN retains 14 percent interest rate, justifies sustenance of tight monetary policy

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The Monetary Policy Committee, MPC, of the Central Bank of Nigeria, CBN, has retained the monetary policy rate at 14 per cent, explaining that it opted to retain the tightening measures despite pressures to loosen its monetary policy stance owing to its success so far and threats surrounding expansionary measures.

All 11 members of the committee yesterday voted unanimously to hold monetary policy rates constant at  14 per cent; retain the asymmetric corridor of +200/-500 basis points around the MPR; retain the Cash Reserve Requirement, CRR, at 22.5 per cent; and retain the Liquidity Ratio at 30 per cent.

These rates have been in place for almost two years now surviving about seven MPC meetings.

While reading out the committee’s decision to journalists in Abuja on Thursday, the CBN governor, Godwin Emefiele, stated that the MPC considered the options to loosen, hold or tighten.

“The Committee continues to hold the view that although loosening would encourage the flow of credit to the real sector, help in reduction of the aggregate cost of credit and spur business spending and investment, thereby reinforcing the CBN’s support for output growth and economic recovery, it, however, believed that doing so will reverse more rapidly, the gains of price and exchange rate stability achieved so far given the liquidity impact that would entail.

“The ensuing liquidity will exert pressure on the exchange rate in the light of increased capital flow reversals arising from monetary policy normalisation by the US Fed. This would further depress the capital market.

“As for tightening, the MPC hold the view that, while tightening will strengthen the stability of the foreign exchange market because of its dampening effect on the demand for foreign exchange, it was however convinced that this would simultaneously dampen investment growth, widen the output gap, depress aggregate demand and weaken output growth.

“The MPC recognises the fact that it had held the policy rate and other policy parameters constant over the last several meetings. The Committee underscores that by holding its policy position constant, it has confidence in the various policies and administrative measures deployed by the CBN which have resulted in the moderation in domestic price levels and stability in the foreign exchange rate.

“Thus, a hold position is an expression of confidence in the policy regime, given the gradual improvements in both output growth and price stability.

“On this premise, the downside risks to growth and upside risks to inflation appears contained,” he said.

The CBN governor further stated that the committee thought that the drop in inflation is seasonal and not sustainable, adding that the upside risk to inflation still remains.

According to him, “Committee noted the benign performance of inflation, a drop in headline inflation was driven by food inflation which moderated, core inflation, however, came up marginally.

“The committee noted that the moderation in inflation was largely seasonally driven and was therefore unsustainable as prices were expected to pick towards the end of the year.

“The MPC observed that the near-time upside risk to inflation remains.”

Emefiele added that the committee advised that the Anchors Borrower Programme be extended to fish and palm oil production, disclosing that committee members were of the opinion that tightening will dampen investor confidence while loosening will rapidly reverse the stability being witnessed in the exchange rate regime and depress the capital market.

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