‘US rate cut opens doors for CBN to re-join global easing train’


Less than six months after it slashed the Monetary Policy Rate (MPR), the Central Bank of Nigeria (CBN) may be on the march again to rejoin the global monetary easing train , probably next month, as the United States’ Federal Reserve Bank has made the move.

The Federal Reserve last week cut its interest rate by 25 points for the first time since the 2008 global financial meltdown.

That followed the CBN’s last March reduction of its MPR by 50 basis points to 13.5 per cent from 14 per cent.

Commenting on this, Lukman Otunuga, the London-based research analyst at FXTM, an online financial trading company, said easing monetary policy typically boosts risk assets and weakens the currency.

“However, the reaction across financial markets was the complete opposite with stocks tumbling and Dollar charging to a fresh two-year high.Although the US rate cut was widely expected, the forward guidance left investors with more questions than answers. With Jerome Powell suggesting that the Fed was not about to start a long series of rate cuts, investors are now pondering whether July’s move was a ‘one-and-done.’ While the Fed also left the door open for future cuts, saying it will ‘act as appropriate to sustain the expansion’, this will be heavily influenced by data and US-China trade developments”, he added.

As for its implications for Nigeria, Otunuga said: “Although inflation in Nigeria remains above the 6 per cent to 9 per cent target range, the CBN is likely to cut rates in a bid to revive growth by stimulating consumption. How deep rates are cut will depend on inflation and second quarter GDP data.  With lower rates encouraging businesses to bolster investments and offering  banks more incentive to lend to corporations and households, this will  be supportive of Nigeria’s growth.”

Surely, if the outcome of the last Monetary Policy Committee (MPC) meeting in Abuja is anything to go by, this might be in syinc with the apex bank’s plan.

Its Governor, Godwin Emefiele, had reasoned that given the happenings in the external sector and the fact that inflation was moderating, tightening the monetary policy should not be an option.

Emefiele explained that this was based on the conviction that restriction of the capacity of banks to create money could curtail their credit creation capabilities.

On the contrary, he said the MPC was of the view that while loosening could increase money supply, stimulate aggregate demand and strengthen domestic production, the economy could be filled with liquidity, especially if loosening could drive growth in consumer credit without commensurate adjustment in aggregate output.

“It (MPC) also observed that since interest rates were currently trending downwards, it is safer to await the full impact of these policy actions on the economy before a review of the position of monetary policy,” he added.

Giving reason for the March 26 rate cut, Emefiele, had said:

“The MPC noted the encumbrances and constraints imposed on fiscal policy and the associated vulnerabilities as it has consistently failed to mobilise enough revenues to support development as enunciated in the Economic Recovery Growth Plan (ERGP), leaving room for continued debt financing, not previously envisaged. Against this backdrop, it is imperative for monetary policy to provide the much-needed leverage to support output growth and employment generation in the country”.

The reduction of the MPR, the determinant of interest rate or the rate at which the CBN lends to commercial banks, often determines the cost of borrowing in the economy.

This was coming after holding the MPR at 14 per cent for 15 consecutive months. The CBN last tweaked the rate in July 2016, when it raised the MPR by 200 basis points to 14 per cent.

Before the rate cut, Otunuga had last March urged President Buhari to rev up the economy to make inflation fall to between 6 per cent and 9 per cent, saying that that band should be able to offer a window for the CBN to cut interest rate in an effort to boost domestic economy.

“The problem with them cutting rates last year was the fact that Federal Reserve wanted to hike their interest rates. So naturally, this would widen the interest rate differentials between the Naira and the dollar. Of course, that would impact the Naira structure.

“In the middle of 2018 and parts of 2019, major central banks across the world were actually very cautious. We have the Federal Reserve, which adopted the patient stance. What is meant by patient stance is that they may be hesitant to actually raise the interest rates. This is negative for the dollar and good for Nigeria. We have the European Central Bank (ECB), which has cut growth forecast for Europe. We have the Bank of Japan, which has continued to maintain overall framework policy; we have the Bank of England, which is still concerned with the Brexit developments to bring any big economic policy. We have other emerging markets such as Turkey, Peoples’ Bank of China.

“The central banks has actually tended to the cautious stance. CBN has actually explored this caution. We are living at a time where major central banks across the world are quite hesitant to raise interest rates. This actually could provide CBN some breathing room to also cut the interest rate”, the FXTM analyst had predicted before the rate cut.

The CBN boss said the MPC (at the July meeting) decided to leave the rate unchanged at 13.5 per cent because all the 11 members that attended the meeting agreed to retain the current monetary policy stance.

He said apart from the MPR, the committee decided to hold the Cash Reserves Ratio at 22.5 per cent.

Also retained are the Liquidity Ratio, which was left at 30 per cent; and the Asymmetric Window, which was left at +200 and -500 basis points around the MPR.

This is the third time the MPC would be retaining all the key benchmark monetary policy parameters.