The Monetary Policy Committee of the Central Bank of Nigeria on Tuesday hiked the MPR by 200 basis points to 14 per cent, contrary to expectations of financial analysts which had predicted that the Monetary Policy Rate would retain its 12 percent level.
The 14 per cent MPR announced by the CBN is the highest in over a decade, but the committee left the Cash Reserve Ratio and the liquidity ratio unchanged at 22.5 per cent and 30 per cent, respectively.
The CBN Governor, Godwin Emefiele, who announced the decision of the committee after a two-day meeting held at the apex bank’s headquarters in Abuja, said eight out of the 12 members of the committee attended the meeting.
Out of the eight, he said five members voted in favour of monetary tightening, while the other three voted to hold the MPR at 12 per cent.
The MPR is the anchor rate at which the CBN, in performing its role as the lender of last resort, lends to the Deposit Money Banks to boost the level of liquidity in the banking system.
If the apex bank intends to increase the level of liquidity in the economy, it reduces the MPR but increases it whenever it desires to tighten money supply.
In taking the decision to increase the MPR, the CBN governor said the committee was faced with two policy choices – whether to hold or reduce the rate to stimulate growth, or increase it in order to curb inflation.
Emefiele, however, said when considered from the standpoint that the primary mandate of the CBN was to maintain price stability, the committee decided to focus on its mandate by checking inflationary pressures.
The governor explained that members of the committee agreed that the economy was passing through a difficult phase, adding that the concern was that headline inflation had risen significantly in June.
He said the June inflation of 16.5 per cent, which is the highest in 11 years, was approaching twice the upper limit of the CBN policy reference band.
The committee, he said, noted that inflation had risen significantly, eroding real purchasing power of fixed income earners and dragging down growth.
Emefiele said the high inflationary trend had culminated in negative real interest rates in the economy, noting that this was discouraging savings.
According to him, members of the committee also noted that the negative real interest rates did not support the recent flexible foreign exchange market as foreign investors’ attitude had remained lukewarm, showing unwillingness to bring in new capital under the circumstance.
He said the decision to raise interest rate would give impetus to improving the liquidity of the foreign exchange market and the urgent need to deepen the market to ensure self-sustainability.
The governor said members were of the opinion that the liquidity of the foreign exchange market would boost manufacturing and industrial output, thereby stimulating the much needed growth.
He stated, “The MPC was further concerned that while the situation called for obvious tightening of the monetary policy stance, the technical recession confronting the economy and the prospects of negative growth to year-end needed to be factored into the policy parameters.
“The arguments in favour of growth were anchored on the premise that the current inflationary episode was largely structural.”
“Members called on the Federal Government to fast-track the implementation of the 2016 budget in order to stimulate economic activity to bridge the output gap and create employment,” he added.
When asked about the state of Nigerian banking system, the governor maintained that the industry remained strong and that there was no need for depositors to panic.
He said the fact that the management team of a bank was removed by the CBN did not mean that the lender was in distress.
Such an action, he noted, would always be taken to protect depositors’ funds when there were infractions of rules and regulation.
Emefiele added, “Let me say that since 2009, the CBN has come out to say boldly that no depositor of a Nigerian bank will lose their deposit and we stood by that to the extent that the CBN even issued guarantees in favour of any depositor and those guarantees have indeed not crystallised since 2010.”
On the bank’s assessment of the new foreign exchange policy, Emefiele said, “It has been excellent so far given that we had a 16-month period of no activity in the foreign exchange market.
“I will say that the results have been good with a few activities that we are not too happy about, but we feel that in the course of time, because it is just one month since this started, there is a lot of room for improvement.”
However, financial analysts faulted the decision of the MPC to increase the benchmark lending rate from 12 per cent to 14 per cent, adding that the decision would not result in the CBN’s objective of checking inflationary pressure.
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