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Experts Commend CBN For Lending Rate Cut

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Financial experts have commended the Central Bank for reducing the benchmark lending rate from 14 per cent to 13.5 per cent.

The Central Bank governor, Godwin Emefiele, had on Tuesday while briefing journalists in Abuja, said its Monetary Policy Committee (MPC) took the decision at its 266th meeting. Also, the Cash Reserve Ratio (CRR) was retained at 22.5 per cent and Liquidity Ratio (LR) at 30 per cent.This is the first time the lending rate has been altered since July 2016.

In separate interviews in Ota, Ogun State, the financial experts said the action would enable more investors, particularly the small and medium enterprises (SMES) to access loans from banks.

Samuel Nzekwe, a former president, Association of National Accountants of Nigeria (ANAN), said the reduction of the lending rate was the right step in the right direction.

The former ANAN president said there was the need for CBN to also reduce the Cash Reserve Ratio (CRR) so that banks could have more funds to lend to investors.

“CBN should look holistically at other monetary instruments like CRR and Liquidity Ratio (LR) to make additional funds available to the people,’’ he said.

Also, Titus Okurounmu, a former director, Budgetary Department, CBN, said the MPC’s decision to cut down the lending rate was a welcome development.

The Monetary Policy Committee (MCP) of the Central Bank of Nigeria (CBN) yesterday disappointed analysts who had  in recent times predicted a status quo at the end of its two – day statutory meeting shocking the investment world with a surprise cut in interest rate.

Rising from its meeting in Abuja, on tuesday, the 11-man committee had voted to cut the Monetary Policy Rate (MPC) by 50 basis points from 14 per cent to 13.5 per cent and left the Cash Reserve Ratio at 22.5 per cent, the Liquidity Ratio at 30 per cent and the asymmetric band retained at +200 bps and – 500 bps around MPR.

The decision to cut benchmark lending rate is the first time the MPC took a dovish stance since November 2015, when it cut MPR to 11 per cent from 13 per cent. MPR had remained constant since it was raised to 14 per cent in July 2016.

The MPC decided by a vote of six out of 11 members to reduce the Monetary Policy Rate (MPR) by 50 basis points. Two members voted to reduce the MPR by 25 basis points, while one member voted to reduce it by 100 basis points. Two members, however, voted to hold the MPR at its current level. Ten members voted to hold all other parameters constant, while a member voted to reduce the Cash Reserve Ratio (CRR) by 100 basis points from 22.5 to 21.5 per cent.

Rising from the MPC meeting on Tuesday, governor of the CBN, Godwin Emefiele, noted that the rate cut “is meant to signal that there is a need for us to move course a little further. To do so we need to begin to look at money supply, liquidity to push growth.”

Last week, Emefiele had said the apex bank would maintain a hawkish stance in 2019, basing his projection on the outlook that inflation would remain in the double digit and would likely rise in the course of the year, whilst expressing optimism that the economy would grow by at least three per cent.

The reaction of analysts to the rate cut was one of surprise as many whose opinion had been sampled had predicted that the status quo which had been maintained for a couple of years would still remain. For analysts at Afrinvest West Africa they had expected the MPC to hold all policy rates at current levels, although the case for monetary easing has become compelling, however, “our expectations were off as the Committee favoured a rate reduction.

“The Committee in an unexpected twist, cited the need to shift policy focus to supporting growth amongst other considerations. Since the July 2016 tweak in MPR and the subsequent use of short-term market rates to anchor monetary policy, we have continuously expressed our views on the redundancy of the benchmark rate. We think the MPC is moving back to convention and aligning policy rate to market rates.”

Currently, the average short-term discount rate settled at 12.7 per cent, implying an average yield of 13.6 per cent, which aligns with the new MPR at 13.5 per cent. The Afrinvest analysts however said they were not distracted to believe an easing cycle has begun, rather, “we think policy stance remains intact considering global interest rate development and the desperation to sustain and retain flows.

“The CBN can always resort to OMO to achieve the objective of attracting and retaining capital flows.In addition, credit to private sector is not expected to improve on the back of rate reduction as structural bottlenecks and the elevated business risk environment remain drags to credit creation. Price pressures, on the other hand, should also not deteriorate as it has been consistently proven that Nigeria’s inflation is largely cost push.”

Although the decision of the 123rd MPC meeting was not anticipated by the market, the magnitude of rate cut should result in a muted impact on yields. Already, short – term rates are trending downwards post elections as foreign flows continue to be attracted to local high yielding instruments. Evidently, foreign capital inflows must be sustained from the CBN’s perspective and barring any short-term shock in the oil market, market conditions would have forced short-term and long-term yields (at least) 200bps lower even if MPR was retained at 14 per cent.

On the impact on the fixed income market, Afrinvest analysts said “we expect the initial reaction to be a soft moderation in average bond yields, at least 50bps to 100bps, but long-term expectation should see up to 200bps yield decline from current levels. Fund managers trading above 5-year term to maturity on the yield curve would benefit the most. The short-term fixed income market (OMO and T-Bills) may also experience slow activities in the short-term as we expect possible further drop in discount rate (at least 50bps).

“Sentiment remains fundamentally weak in the equities market; this is not anticipated to change in the immediate on rate cut. The gradual recovery in the economy is slow paced and may not support an overtly bullish earnings expectation in the short-term. Yet, we believe the market has been far compressed and remains attractive for equity investors. Post-2019 presidential election conclusion, market has lost on 16 of 22 days so far traded. Current market valuation (7.9x) relative to Egypt (16.6x), Kenya (11.3x), Ghana (22.9x) and South Africa (17.0x) shows clear undervaluation; we are convinced the next phase is a bull run.”

Lukman Otunuga, analyst at FXTM on his part said “investors were caught completely off-guard after the Central Bank of Nigeria (CBN) unexpectedly cut its benchmark interest rate for the first time in more than two years in an effort to support growth.

“The central bank reduced interest rates from 14 per cent to 13.5 per cent as inflationary pressures eased and macroeconomic conditions stabilised during the first quarter of 2019. One of the initial arguments against a possible rate cut in Nigeria was the widening interest rate differentials between the dollar and naira.

“However, a “patient” Federal Reserve coupled with rising speculation of a possible rate cut in the United States, has offered the central bank some breathing room to take action. Today’s move by the CBN may open the doors to further rate cuts in the future, especially if macroeconomic conditions continue to improve and inflation cools further.”

Noting that future cuts would be based around economic conditions in Nigeria improving, inflationary pressures moderating and oil prices pushing higher, Otunuga said stabilising macroeconomic conditions in Nigeria and easing inflationary pressures offered a window of opportunity for the Central Bank of Nigeria (CBN) to cut interest rates in a bid to support growth.

“The decision could have also been around stabilising oil prices, a semblance of calm following the presidential elections, dollar weakness and the fact the Fed sounded more dovish than expected during its latest policy meeting,” he said.

Otunuga believes the rate cut would reduce borrowing costs across the Nigerian economy which is supportive of economic growth.

“Repeated signs of Nigeria stabilising and experiencing an economic expansion is likely to boost investor interest in investing in the country despite the lower rates. While other emerging economies with higher rates may be attractive, the macroeconomic conditions of the respective nations will impact their attraction to investors,” he said.

Managing director and chief executive of Cowry Assets Management, Johnson Chukwu noted that the MPC’s decision to cut the policy rate by 50bps was engendered by the feeling of sustainability in the level of stability of Nigeria’s macroeconomic indices which were expected to drive growth going forward and the signal by U.S Fed to leave Fed rate unchanged in 2019, which was expected to redirect foreign inflows into emerging and developing economies like Nigeria.

“We do not expect significant growth in credit to private businesses given the inelastic nature of the relationship between credit to private sector and reduction in MPR,”Chukwu said.

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