The Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, said on Thursday that he would pursue a gradual reduction in interest rates, an apparent shift away from his predecessor’s hawkish monetary policy that was credited with bringing inflation down to single digits.
Emefiele said policy would be aimed at seeking a reduction in overall lending rates to make it cheaper to invest, although he didn’t give a time frame for doing so, leaving it open for him to hold off until the monetary conditions allow it.
Interest rates have been stuck at 12 percent since late 2011, and several measures have been made to tighten liquidity, which has been credited with gradually bringing inflation down, but businesses complain that lending rates are too punitive.
“We shall pursue a gradual reduction in interest rates,” he said, adding that “A comparison of selected macro-economic aggregates from some emerging market countries, including South Africa, Brazil, India, China, Turkey and Malaysia indicate that Nigeria has one of the highest Treasury Bill rates.
“Such high rates create preserved incentives for commercial banks to simply buy virtually risk-free government bonds rather than lend to real sector.”
He said that to enhance financial access and reduce the cost of borrowing credit, there was the need to pursue policies targeted at making Nigeria’s Treasury Bill rate more comparative to other emerging markets.
Emefiele said that while reduction in both deposit rates would encourage investment attitude in savers, a reduction in lending rates would make credit cheaper for potential investors.
“The bank will also begin to include unemployment rates as one of the key variables considered for its monetary policy decisions.
“In the interim, we will continue to maintain a monetary policy stance, reflecting the liquidity conditions in the economy as well as the potential fiscal expansion in the run-up to the 2015 general elections,” he said.
On the exchange rate policy, he said the key goal would be to maintain exchange rate stability in view of the high import dependent nature of the economy and the significant exchange rate it passed through in recent years.
According to him, a systematic depreciation of the Naira would literarily translate to considerable inflationary pressure with attendant effect on macro-economic stability.
“Therefore, under my leadership, the bank will continue to focus on maintaining exchange rate stability and preserve the value of the domestic currency.
“We will sustain the managed float regime in the management of the exchange rate as this will allow the bank to intervene when necessary to offset pressure on the exchange rate.
“To support this strategy, we will strive to build-up and maintain a healthy external reserve position and ensure external balance,” Emefiele said.
The new CBN governor explained that there was no doubt that reducing the interest rate and maintaining the exchange rate was a daunting twin goal.
“In this pursuit, the bank will work with all stakeholders to device measures to ensure the goals are achieved.”
On Financial System Stability, he said the bank would continue to sustain the effective management of the potential threats and avoid systemic crisis.
“The core of my vision is to effectively manage potential threats to financial stability and create a strong governance regime that is conducive for financial intermediation, innovative finance and inclusiveness.
“In this regard, we hope to anchor on two pillars of management factors that create liquidity shocks and zero tolerance on practice that undermine the health of financial institutions,’’ he said.
To achieve the goal, Emefiele said the bank would work with stakeholders to aggressively shore up the reserve and also engage both the fiscal and political authorities.
He assured Nigerians of enhanced banking supervisory purview over the banking system and strengthening of risk-based supervision mechanism to ensure overall health and banking system stability.
Emefiele said he would create a Central Bank that is professional, apolitical, people focused and a bank that would dissipate its energies on building a resilient financial system to serve growth and development needs of Nigerians.
Meanwhile, the treasury bills fell 20 basis points across the board on Thursday to an average of 11.3 percent after his remarks, as buyers snapped up bonds.
Nigeria’s benchmark 10-year bond yield was trading flat on Thursday at 12.52 percent, after initially falling 7 basis points on the new central bank governor’s remarks that he would seek to cut interest rates. The 3-year bond yield was down 16 basis points to 11.71 percent.
The core of his vision was zero tolerance to practices that undermine financial stability, he said at his first press conference since taking over on Tuesday from Lamido Sanusi, whom President Goodluck Jonathan suspended in February.
But he gave few details of how exactly that would be enforced. Nigeria suffered a severe financial crisis in 2008 that nearly collapsed nine banks, and Sanusi stepped in with a bail out package and had some of the chief executives sacked.
“Although Emefiele’s comments were qualified with the statement that it is a ‘daunting’ task to achieve the twin goals of reducing interest rates while maintaining FX rates, the very fact that lower interest rates were mentioned sends a strong signal to the markets,” said Standard Chartered’s Razia Khan.
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