The Central Bank of Nigeria concluded its Monetary Policy Meeting on Wednesday leaving Monetary Policy Rates at 14% for the second year running. The central bank’s governor, Godwin Emefiele announced that it was leaving MPR at 14%, CRR at 22.5% Liquidity Ratio at 30%.
In terms of the vote split the 7 members voted to keep rates the same and 2 members, however, voted to increase the MPR by 50 basis points, while one member voted to increase the MPR by 25 basis points.
The decision to keep rates the same was not unexpected as most analysts surveyed by Nairametrics predicted that the CBN will yet again keep things the same as it has since July 2018. What was however different this time was the CBN’s latest initiative at artificially bringing down interest rates.
In a surprise move the CBN Governor Godwin Emefiele encouraged large corporations to “issue commercial paper to meet their credit needs and the Central Bank of Nigeria may, if need be, buy those instruments to complement the efforts of the DMBs.”
This decision suggests that the Central Bank is willing to start buying corporate debts in an effort to inject liquidity in the market and put cash on the balance sheet of corporates. The Governor went further in its press briefing indicating that they intend to buy these debts at lower rates.
Just recently, Dangote Group, one of Nigeria’s largest corporate organisations listed its N50 billion Commercial Paper at 13.21%, one of the lowest ever by a private enterprise. Sterling Bank, UACN and Nigeria Breweries have also issued commercial papers this year at yields of about 16%, 14%, and 16% respectively.
Some Economist that we spoke to at Nairametrics suggest the CBN buying private sector debt is basically quantitative easing (QE). QE is an economic policy used during the world economic crisis and involves the CBN indirectly placing money on the balance sheet of banks to on-lend to the private sector via financial instruments. CBN lends to banks at single digits and then the money is lent by the banks via instruments like commercial papers to the private sector at rates lower than 10%.
The Central Bank Governor also went further. In the policy statement they indicated that “as a way of incentivise deposit money banks to increase lending to the manufacturing and agriculture sectors, a differentiated dynamic cash reserves requirement (CRR)regime would be implemented, to direct cheap long-term bank credit at 9 per cent, with a minimum tenor of seven (7) years and two (2) years moratorium to employment elastic sectors of the Nigerian economy.”
This basically means the CBN will release more of the cash statutorily held on behalf of banks to them provided they are willing to lend the money to select sectors at an interest rate of 9% and a tenor of 7 years.
Analysts speaking to by Nairametrics suggest this might be a hard sell especially of treasury bills rates and long-term government bond yields continue to be above double digits. Banks will rather keep the cash with the CBN at a risk-free rate than lend it at 9% to businesses in an economy that is susceptible to price shocks and external risks.