The Central Bank of Nigeria (CBN) would engage deposit money banks (DMBs) in the country to issue commercial papers to meet their credit needs at low interest rates as part of measures to encourage lending to the private sector.
This was even as the monetary policy committee of the CBN retained monetary policy rate at 14% for the 11th consecutive time.
According to the apex bank, the step is in line with the call by the Monetary Policy Committee (MPC) at its 262nd meeting held between Monday and Tuesday this week. The MPC had urged the CBN to encourage deposit money banks to increase the flow of credit to the real economy to consolidate economic recovery.
In this regard, the committee believes that a heterodox approach to reform the market, to strengthen the flow of credit would be appropriate at this time.
Consequently, CBN governor, Godwin Emefiele said, “Credit constraint businesses particularly the large corporates are encouraged to issue commercial papers to meet their credit needs at low interest rates (possibly single digit rates).”
He said the CBN may if need be, buy those instruments to complement the efforts of the deposit money banks.
Addressing journalists at a press conference to mark the end of the two-day MPC meeting yesterday, Emefiele said as a way of “incentivising the DMBs to increase lending to the manufacturing sector, a differentiated dynamic cash reserve requirement regime would be implemented to direct cheap long-term-bank credit at 9 per cent with a minimum tenure of seven years and two years moratorium in employment elastic sector of the Nigerian economy.”
He said the details of this framework were being worked out by the banking supervision and monetary policy department and would be released very soon.
That new development was announced yesterday in the same communique that also disclosed that the MPC has decided by a vote of seven members to retain the Monetary Policy Rate (MPR) at 14 per cent alongside all policy parameters for the 25th month consecutively.
However, two out of the 10 members that attended the meeting voted to increase the MPR by 50 basis points, while one member voted to increase the MPR by 25 basis points.
Consequently, the MPC voted to also retain CRR at 22.5 per cent; liquidity ratio at 30.0 per cent, and asymmetric corridor at +200 and -500 basis points around the MPR.
The central bank governor who chaired the meeting said the committee painstakingly reviewed the options available – it considered the sustained positive growth in the real GDP over the last quarter, stability in the foreign exchange market, high level of incretion to external reserve, as well as the inflationary trend.
Emefiele said the committee strongly considered the option of tightening, believing that tightening would curtail the threat of a rise in inflation even as the injection from the fiscal authority would still provide the economy with substantial liquidity.
The committee was of the view that tightening would help save the tide of capital flow reversals in the face of sustained monetary policy normalisation in some advanced economies.
The believe was that if that was done, it would moderate inflationary pressure to single digit level, increase interest rate, build investors’ confidence, with attendant positive impact on capital inflows and further stabilise the country’s exchange rate.
On the contrary, the MPC said raising interest rate at this time would weaken consumption and raise the cost of borrowing to investors in the domestic economy.
Emefiele said in considering the option of loosening, the committee considered the potential effect of stimulating aggregate demand through lower cost of capital.
“This could stimulate consumption and aggregate demand. If this crystallizes, it will exacerbate inflationary and exchange rate pressures as well as return real interest rate to negative trajectory. Moreover, lowering policy rate may not translate to an automatic reduction in market rates due to poor transmission mechanism,” he added.
The committee is also of the view that loosening could reverse the gains already made with reduced importation which has strengthened the current account balance. It would also lower banks’ appetite and possible rise in NPLs which could negatively impact on the banking industry’s stability.
In the discussion for a hold, it was noted that risks to the macro economy and financial environment appear fairly balanced with improvements in output growth and inflation. “Holding policy at the current stance will support growth and further moderate inflation,” Emefiele asserted.
The committee noted that appetite of the public for loosening and concern that holding MPR at 14 per cent since July 2016, and considering the dynamic nature of the market, the rate might have lost its signaling effect on the market. Hence, dampen market expectations.
The argument in favour of maintaining the current policy stance was to monitor the managing of the liquidity impact of the fiscal injections and election – related expenditure ahead of the 2019 general elections.
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