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The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), has officially cut the Monetary Policy Rate (MPR) to 13.50% from 14%, while retaining CRR at 22.5%.

The CBN Governor, Godwin Emefiele, disclosed this during a press conference at the end of the two-day MPC meeting held on Tuesday in Abuja. The cut is the first time the MPC altered the MPR since July 2016.

The new rate contradicts analysts’ predictions that MPC would keep the MPR unchanged. Also, recall that the MPC, in its January communique, stated that the possibility of loosening the rates was remote due to domestic and global inflationary pressures.

Highlights of MPC meeting 

  • MPC cut down the MPR by 50 (0.5%) basis points to 13.50% from 14%.
  • All other key parameters are held unchanged
  • Asymmetric corridor of +200/-500 basis points around MPR was retained
  • Retain the CRR at 22.5%; and
  • Retain the Liquidity Ratio at 30%.

MPR cuts aimed at strengthening the nation’s feeble economic growth

In an attempt to justify the cut in MPC, Mr. Emefiele reiterated that the cut in the rates was to support the nation’s feeble economic growth at this time.

The CBN governor further highlighted the need to cut MPR to help reduce the unemployment rate and bolster the diversification agenda of the country’s economy.

Global economic events led to drop MPR

The CBN governor noted that uncertainties surrounding the global economies suggest increasing macroeconomic global vulnerability in the medium term.

According to the CBN governor, global economies were characterized by legacy headwinds from the second half of 2018. Mr. Emefiele noted the following episodes that characterized the global economy,

“The continued trade war between U.S & China, policy uncertainties in advanced economies, Central Banks persisting uncertainties surrounding BreXit negotiations, Vulnerabilities in major financial markets and rising public debts in some emerging economies and developing economies.”

Consequently, the MPC reiterated that global output was downgraded by the International monetary fund (IMF) from 3.5% in 2019, from 3.7% in 2018. Also, price development across developed economies continue to moderate in the review period alongside signals of weakening output growth.

In the light of these developments, Mr. Emefiele noted that,

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“the U.S Federal Reserve, the Banks of England and European Central Bank (ECB) retreated from the earlier stand of monetary policy normalization in favour of monetary policy accommodation. This led to volatility in the financial market of the advanced economies, and the balancing of portfolio moved capital from the equity to the bond markets.”

Higher capital inflows expected 

Mr. Emefiele in a communique read after the meeting,  further stated the capital inflow will increase owing to volatilities in financial markets of major developed economies like U.S.

The MPC noted the moderate appreciation of the $U.S against currencies of most advanced and emerging market economies, it further noted the trend of declining long term yields in the United States, and a likely yield that capital flows may be redirected to emerging and developing economies, in the medium term.

The MPC, however, stressed that in spite of the recent capital inflow upsurge into the economy, the all share index and market capitalization continue to decline, reflecting global sentiments in portfolio rebalancing from the equities to the fixed income securities.

MPC Considerations

The MPC considered the tepid output growth in 2018 and a positive forecast for 2019 in its decisions.

Also, the MPC attributed the recent upsurge in capital inflow as a demonstration of sustained confidence by the foreign investor communities in the Nigerian economy. Mr Emefiele however stated;

The MPC is not unmindful of developments in the global economy, noting the recent low down in growth in some advanced economies. Therefore, MPC underscored the need to monitor the movement of capital flows and the continued downturn the equities market, noting that recent surge in portfolio inflow were concentrated in the money market.

Markets may be neutral 

Analysts at Nairametrics opined the economy will react in the manner:

  • For the equities market, the cut in MPR will have no significant positive or negative effect. Investors are waiting for clearer macroeconomic direction in the Buhari administration’s second term. This is so because foreign portfolio investors are more interested in the fixed income market.
  • For the money market and fixed income segment, the CBN may use the lower MPR, and overwhelming interest from investors, to further lower rates on treasury bills and bonds

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