CBN retains benchmark interest rate at 12.5 percent

The Central Bank of Nigeria (CBN) has retained the benchmark interest rate at 12.5 per cent.

Briefing journalists at the end of the July’s monetary policy committee (MPC) meeting, the CBN Governor, Mr Godwin Emefiele also announced the MPCs decision to keep all parameters constant.

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Thus, the CBN retained the cash reserve ratio (CRR) at 27.5%, liquidity ratio at 30% and asymmetric corridor around the MPR at +200/-500 basis points.

The CBN said the decision to retain the rate is to check the rising inflationary rate and the need to consolidate on the gains achieved.

He explained further that tightening would increase the cost of production which would translate to higher prices of goods and services and harder economic conditions for Nigerians.

Prof Uche Joe Uwaleke, a professor of Finance and Capital Market said this is a viable option CBN has at this time.

He said with inflation at 12.56 per cent, according to the recent Nigerian Bureau of Statistics data, the Central Bank of Nigeria (CBN) has to retain benchmark interest rate at 12.5 per cent to figure the inflation.

According to him, the recent increase in the pump price of fuel and the planned unification of Exchange rates represent downside risk to inflation.

Thus, “a further reduction in MPR even by 50 basis points from the current 12.5% will result in widening the negative real interest rate which is inimical to capital inflows from foreign investors.”

He, however, noted that a reduction in the Cash Reserve Requirement (CRR) would have been ideal to free up liquidity for the Deposit Money Banks. But the challenge will be its potential to put more pressure on the forex market and by extension on external reserves.

The reality is that monetary policy tools have been stretched to the limits he noted.

He said the “MPC can only advise the CBN to sustain and ensure the effective implementation of heterodox measures already introduced to strengthen the asset quality and financial soundness of the banking sector including the recent Global Standing Instruction which will facilitate repayment of loans by banks’ customers leading to a reduction in non-performing loans and improvement in liquidity.”

“In order to support economic growth in a period of COVID-19, through increased credit to the real sectors, the MPC will also advise the CBN to maintain the Loan-to-Deposit Ratio of 65% for DMBs,” he said.

“I see the MPC commending the CBN for all its COVID’19 measures aimed at containing the economic impact of the crisis including the recent non-interest interventions in the Agric value chain, Textiles, healthcare, creative industries and SMEs in general.

“All these have the potential of positively impacting the capital market.

“By way of direct impact, the CBN should also consider accommodating capital market operators in its COVID’19 intervention schemes” he noted.