MPC delivers another 100bps rate cut, adjusts asymmetric corridor

Must Read

List of United Bank for Africa (UBA) Sort Codes & Branches (with addresses) in Nigeria

The sort code is a number that usually identifies both the bank and the branch where an account is held. The sort...

How To Block Your Bank Account And SIM Card In Case Of Emergency

Losing your phone and wallet or having them stolen can be very frustrating. However, in case that happens to...

List of Access Bank Sort Codes & Branches (with addresses) in Nigeria

The sort code is a number which usually identifies both the bank and the branch where an account is...
- Advertisement -

The Monetary Policy Committee (MPC) continued its expansionary tone in rejigging the economy from a coronavirus-induced recession. The MPC reduced the Monetary Policy Rate (MPR) by 100bps to 11.5% and adjusted corridor rates to +100/-700bps around the MPR.

MPC delivers another 100bps rate cut, adjusts asymmetric corridor
Source: NBS, Vetiva Research

CBN roots for output recovery amid policy dilemma

Given the policy dilemma between supporting the receding economy and restoring price stability, the MPC decided to cut the MPR to hasten economic recovery as it noted that the upwards trend in inflation was non-monetary driven. By a split vote of six-to-four, members of the MPC voted to lower the MPR by 100bps to 11.50%. Amid inflationary pressures, weak capital and remittance flows and low oil receipts, the MPC has utilised the firepower (i.e. the gross international reserves) at its disposal to save the economy from a looming recession. This decision was taken to support a quicker recovery from the recession.

The economy recorded a 6.10% slump in Q2’20 as key sectors contracted including Trade, Manufacturing, Real Estate and Construction as economic activities were grounded to a halt during the 5-week lockdown. This was a far outcry from the -1.03% contraction expected by the CBN. We believe the downturn may persist despite CBN’s policy actions due to the small size of monetary stimuli and a sluggish transmission mechanism. Lockdown easing came with peculiar challenges due to double devaluation of the Naira, upward pressure on the exchange rate in the parallel market and reforms in the energy sector.

Inflation has also been on the uptrend due to energy and FX reforms. Capital importation numbers for Q2 showed both Foreign Direct Investment and Foreign Portfolio Investment fell significantly by 33.41% and 91.14% on a year-on-year basis as an overvalued Naira coupled with risk-off sentiments contributed to the depletion of reserves and adjustment of currency peg. The exchange rate has been devalued twice by a total of 24% year-to-date while parallel market rates rose due to exclusion of maize from the official FX window.

- Advertisement -

Reforms in the downstream sector have equally not been friendly as gains in crude prices for the past three months cascaded into higher monthly pump prices. This had a knock-on impact on inflation as higher transport costs infiltrated into commodity prices. Recently, the Federal Government announced full deregulation, hereby eliminating monthly price guides and allowing marketers fix pump prices. This would further upset prices as inflation maintains its upward sprint, given already pressured consumer wallets.

Read Also:  Nigeria’s Inflation Rate Falls to Lowest in a Year in May

Nine members, out of ten, voted to adjust the asymmetric corridor to +100/- 700bps around the MPR to improve credit growth and economic recovery. The adjustment in the corridor rate effectively reduces the interest rate on commercial bank’s deposits with the Bank via the Standard Deposit Facility, which had been earlier capped at ₦2bn. This also reduces the interest payable to the Central Bank via the Standard Lending Facility. The Central Bank, believes this will corroborate the reduction in savings deposit rate, earlier implemented to moderate commercial banks’ interest expenses and induce lending to the real sector.

Read Also:  Insider Dealing: Heineken Brouwerijen B.V Purchases 274,542 Shares in Nigerian Breweries
Monetary policy room limited, wait-and-see approach expected

Given a glaring pandemic-induced recession, price instability and weak capital flows, the Central Bank has limited capacity to curb inflation. Although recent policy parameter adjustments will boost credit to an extent due to the sustained Loan to Deposit policy rate checks, a rate cut may not translate into cheaper loans due to heightened risks in the business environment given energy reforms and ongoing exchange rate unification efforts that can crystallize forex risks. In addition, limited reserve supply and lean buffers could induce another currency adjustment, if oil prices deteriorate further due to rising cases of coronavirus. Adherence to OPEC+ production cuts and compensation for earlier oil production are further deterrents to reserve accretion.

With respect to growth objectives, the previous hike in the Cash Reserve Ratio (CRR) may need to be reversed to improve credit flow to the real sector, as the decision counters policy actions towards supporting economic growth. Low interest rate environment in the capital market may encourage capital raise for blue chip companies. However, SMEs are left to abysmally high bank lending rates. To cap it all, fiscal reforms are needed to fix infrastructure deficits and reduce cost of doing business. Thus, we believe the Monetary Policy Committee will HOLD rates in its future meeting while monitoring the transmission mechanism of its policies to the broad economy.

- Advertisement -

BRAND SPUR

- Advertisement -
MPC delivers another 100bps rate cut, adjusts asymmetric corridor - Brand SpurMPC delivers another 100bps rate cut, adjusts asymmetric corridor - Brand Spur

Subscribe to BrandSpur Ng

Subscribe for latest updates. Signup to best of brands and business news, informed analysis and opinions among others that can propel you, your business or brand to greater heights.

- Advertisement -

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.

MPC delivers another 100bps rate cut, adjusts asymmetric corridor - Brand SpurMPC delivers another 100bps rate cut, adjusts asymmetric corridor - Brand Spur

Latest News

COVID-19 drives wages down, new ILO report finds

Even before the COVID pandemic hit, hundreds of millions of workers worldwide were being paid less than the minimum...

40 years ago: Mercedes-Benz launched the driver’s airbag and seat belt tensioner in series production

In December 1980, the first S-Class vehicles (126 model series) fitted with innovative restraint systems were delivered to customers Airbags are an elementary feature...

Ecobank Group wins Awards from EMEA Finance, The Banker and Global Finance

The award of ‘Outstanding Crisis Leadership – Finance & Business’ was awarded to Ecobank by Global Finance December 2, 2020 - Leading pan-African banking group,...

Mouka Attains Triple Laurels of Distinction at Brandcom 2020 Awards

Mouka has attained triple laurels at the recent Brandcom Awards, which saw the company clinching the “Brand of the Year”, the “CEO of the...

Nokia confirms 5G as 90 percent more energy efficient

Research undertaken together with Telefónica finds 5G networks up to 90 percent more energy efficient per traffic unit than legacy networks Mobile operators...
- Advertisement -
BrandsPur Weekly Cartoons
- Advertisement -MPC delivers another 100bps rate cut, adjusts asymmetric corridor - Brand SpurMPC delivers another 100bps rate cut, adjusts asymmetric corridor - Brand Spur