CBN reduces interest rate to 12.5%, forecasts slower growth in Q2 2020

0

CEM Report, Lagos
The Central Bank of Nigeria has reduced the Monetary Policy Rate (MPR) to 12.5 per cent from 13.5 per cent while Cash Reserve Ratio and the liquidity ratio are retained at 27.5 per cent and 30 per cent respectively.

Monetary Policy Committee announced this in the communique issued after the committee’s meeting on Thursday 28.

The MPC considered the reduction of the Monetary Policy Rate as the best move considering the impact tightening or holding the rate will have on recovery of the economy after the impact of the corona virus pandemic

“MPC was of the view that tightening of policy stance is for now inappropriate. This is because tightening will result in further contraction of aggregate demand, leading to decline in output, which is necessary to sustain the supply chain for growth recovery. Tightening will also increase cost of credit and reduce investment and impact negatively on output growth.

On the other hand, holding previous policy stance may indicate that the monetary authorities are insensitive to prevailing weak economic conditions pointing to the need to signal a direction towards immediate recovery.

“The Monetary Policy Committee also feels that a hold decision may slowdown the trajectory of the weakened economy, compared with a loosening stance, thereby slackening output growth.

[ALSO READ] CBN cuts interest rate on OFIs facilities, granting one year moratorium

“The MPC noted that the imperative for monetary policy at the May 2020 meeting was to strike a balance between supporting the recovery of output growth while maintaining stable price development across inflation, the exchange rate and market interest rates.

The Committee noted that the Cash Reserve Requirement (CRR) was recently adjusted upwards as a means of tightening the stance of policy. Therefore, increasing MPR at this stage will thus be counter-intuitive and will result in upward pressure on retail market rates.

“The MPC emphasized the need for Government to work towards a gradual reopening of the economy in line with recommendations of the Presidential Task Force (PTF) and advice from medical experts. This is to enable the resumption of economic activities necessary to stimulate growth, accelerate the pace of recovery and restore livelihoods, particularly the vulnerable in our society.

On global and domestic economic outlook, MPC noted that “the overall medium-term outlook for the global economy remains broadly uncertain as the COVID-19 pandemic and associated containment measures continue to disrupt normal economic activities across the globe.

The global economy is still being confronted by weak aggregate demand due to declining consumer and investor confidence; disruption in global supply chains; shocks to oil and other commodity prices; continued lull in global financial markets; adverse shocks to global capital flows; as well as rising corporate debt in the advanced economies and public debt in some Emerging Market and Developing Economies

The domestic economy on the other hand is expected to shrink further in Q2 2020 and may be also in the third quarter from the positive but lower growth observed in Q1 2020

MPC however maintained that if the combined monetary and fiscal stimulus initiatives by the monetary and fiscal authorities are properly implemented, the economy would reverse to positive growth by the fourth quarter. Hence the optimism on the part of the Committee that the economy may not slide into recession.

0 0 votes
Article Rating
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments