CEM Report, Lagos
The Central Bank of Nigeria has reduced interest rate to 11.5% from 12.5% announced in the last quarter, the Governor, Godwin Emefiele announced Tuesday.
Godwin Emefiele while briefing newsmen after the Monetary Policy Committee meeting which held on Monday 21st and Tuesday 22nd said the decision was reached after members voted 10 to 1 in support of the MPR push down.
According to the communique issued by the apex Bank, the committee noted various developments in the domestic and global economy and its impact on the nation’s inflationary movement.
The committee noted with deep concern the persistent up-tick in inflation for the twelfth consecutive month as headline inflation (year-on-year) rose to 13.22 per cent in August 2020 from 12.82 percent in July 2020.
The increase in headline inflation was largely driven by the persistent increase in the food component, which rose to 16.00 per cent in August 2020 from 15.48 per cent in July 2020.
The key factors considered by the MPC as likely to exert upward pressure on domestic prices in the near term include: the prevalence of security challenges in the country; adverse weather conditions causing flooding in some farming regions; the increase in petroleum pump price; deregulation in electricity tariff; low crude oil price; and exchange rate adjustment.
According to the committee, this therefore shows that the inflationary pressure is due to the prevalence of structural rigidities and supply shocks rather than monetary factors. Hence, the traditional tools of monetary policy may not be helpful in addressing current inflationary pressures. Instead, the useful policies will be the supply-side measures implemented by the Bank.
In the light of this, reducing MPR will signal to the Deposit Money Banks to lend more to stimulate growth, increase aggregate supply, which should dampen prices in the immediate term.
The Committee equally noted the contraction of real Gross Domestic Product (GDP) by 6.10 per cent in the second quarter of 2020 compared with expansions of 1.87 and 2.12 per cent in the preceding quarter of 2020 and the corresponding period of 2019, respectively.
Other development noted include the continued weakness in economic activities as indicated by the Manufacturing and non-Manufacturing Purchasing Manager’s Indices (PMI) which remained below the 50 index point benchmark at 48.5 and 44.3 index points, respectively in August 2020, compared with 42.4 and 43.3 index points in July 2020
On the global scale, the lingering uncertainties associated with the COVID-19 pandemic and downturn in crude oil prices have resulted in persistent weak aggregate demand, disruptions in global supply chains, mixed price development, volatile and downward trending oil prices, as well as rising unemployment.
In this light, the Committee noted the widespread recession in the second quarter of 2020 following the sharp decline in output growth in the Advanced Economies and some Emerging Markets and Developing Economies (EMDEs), as well as the risk of further deterioration in global output growth, associated with the lingering shocks from the COVID-19 pandemic.
Very critical in the global economic development as observed by the MPC is the huge injection of monetary and fiscal stimulus into the global economy with its medium -term inflationary potential.
Also, the global financial markets have remain relatively tight reflecting continued uncertainties. Thus, while markets are showing moderate signs of recovery, financial conditions are yet to ease fully as investors remain cautious of the lingering risk of a secondround of lockdown.
At the end of the MPC meeting, the committee made the following adjustments
- Reduced the MPR by 100 basis points from 12.5 to 11.5 per cent;
- Adjusted the asymmetric corridor from +200/-500 basis points to
+100/-700 basis points around the MPR;
III. Retained the CRR at 27.5 per cent; and
- Retained the Liquidity Ratio at 30 per cent.