The Central Bank yesterday held MPR at 12% for July 2012. This was announced after the conclusion of their Monetary Policy Committee (MPC) meeting held July 23-24 2012. This decision means the MPR, which is the benchmark rate at which the CBN lends or borrow money from banks, has now remained the same for the 10th month straight. The MPC also decided to increase the Banks Cash Reserve Requirements -CRR (the percentage of cash the banks must deposit at the CBN) from 8% to 12%.
Holding the MPR at 12% in my opinion smacks of policy redundancy as the apex body have failed to properly balance the need to bring interest rates down and stave off inflation which has continued to push higher despite the MPR at 12%. The banks has also failed to address the fiscal recklessness of state and governments which have over the last few months borrowed at record high interest rates from banks. So why hasn’t the CBN reduced MPR? They opined that whilst reducing the MPR may help speed up growth which has since slowed partly due to high cost of borrowing, it may expose the country to “potential weakening of the exchange rate which may affect reserves”. They also decided against increasing MPR because they believe the increase will “impact on small businesses which will expose them to higher interest rates on non-performing loans on the books of banks. This leaves them with no choice than to leave the rates at 12% which they opine is in line with their year end expectation that inflation will remain at 12%.
I am no economist but I take sides with the lone member of the MPC who voted that the MPR be reduced. I believe the central objective of any Central Bank is to find ways to reduce interest and stimulate growth in a period of high unemployment and little growth in the economy. As the CBN put it, inflationary pressure has been mainly due to increase in core inflation amongst which were electricity, gas and fuel, prices solely within the control of the Government. Its obvious to me that the biggest challenge the CBN has is reducing Government borrowing which is fueled by a viral appetite to spend by government (State & FG). Especially as most of the state and governments spend a lot of this money on recurrent expenditure a situation that will more likely negate the whatever buffers the CBN has put in place to control inflation. The Banks have little reason to lend at record high interest rates as the spread between their lending and deposit rates are at record highs. For example, First Bank H1 results revealed an average cost of funds of around 2.4% yet their lending rates are anything above 15%.
The CBN has to make lower interest rates its policy mantra above any other , as the major driver of growth on any serious economy is the private sector. Rather than depend year in year out on oil, efforts should be driven towards targeting lower borrowing cost and longer term financing for small businesses which will surely spur the economy to exponential growth. For now, they can keep chasing dreams and putting all their hopes on defending the Naira whilst Government and their agencies continue to borrow and spend till thy kingdom come.