CBN Leaves Interest rates Unchanged at 13.5%

• CBN Leaves Interest rates Unchanged at 13.5%

The Central Bank of Nigeria (CBN) led Monetary Policy Committee (MPC) on Tuesday left interest rates unchanged despite growing global uncertainty and weak economic fundamentals caused by the coronavirus pandemic.

According to the committee, the economic outlook remains uncertain in the medium-term and the committee expects further deterioration in financial market conditions and global output. Similar to the International Monetary Fund (IMF) statement that global growth remained negative presently and will struggle in 2020.

Emphasis was placed on weak foreign reserves amid falling oil prices. The committee said the uncertainty surrounding the COVID-19 and weak global commodity market, especially with the ongoing disagreement between Saudi Arabia and Russia, could further hurt the nation’s economic standing.

The 10 member committee attributed the 17.30 percent decline in the Nigerian Stock Exchange (NSE) All-Share Index this year to the surge in profit-taking, divestment by foreign investors portfolio and increase in capital flight due to the increase in the number of COVID-19 cases.

“The Committee noted the dismal performance in the equities market as the All-Share Index (ASI) decreased by 17.30 per cent and Market Capitalization (MC) by 10.73 per cent between end-December 2019 and March 20, 2020. The decline was largely attributed to profit taking and divestment by foreign portfolio investors, the delisting of shares of three quoted companies and capital outflow associated with the COVID-19 and subdued global economic activity,” the committee’s report published by CBN stated.

Also, the committee agreed that available macroeconomic variables suggest the possibility of subdued output for the nation in 2020. This, they attributed to weak oil prices, low foreign reserves, weak government revenue generation and the continued spread of the coronavirus after the number of confirmed cases rose 44, according to the Nigeria Centre for Disease Control (NCDC) report on Tuesday.

The committee, however, agreed that raising interest rates would worsen the current situation even though it would encourage capital importation and reduce capital flights.

“Increasing the MPR will be contradictory to the recent reduction of interest rate in the CBN intervention windows from 9 to 5 per cent. Besides, an increase in MPR will be taken by the Deposit Money Banks (DMBs) as in invitation to increase lending rates and this 9 will be most undesirable at this point in time when efforts are being made to avert a recession. Besides, a reduction in the MPR, will not encourage the DMBs to reduce lending rates. But other strategies of the CBN are making the DMBs to reduce lending rates in furtherance of the growth objective,” the committee stated.

It also considered loosing to support businesses, new investments, employment creation and generally mitigate COVID-19 risk. However, the need to curtail inflation at 12.2 percent and at the same time sustain capital importation at a period global investors are abandoning the nation’s assets for safe-haven remains paramount.

Therefore, the committee unanimously agreed to leave the Monetary Policy Rate unchanged at 13.5 percent, retain the asymmetric corridor of +200/-500 basis points, maintain liquidity ratio at 30 percent and retain the Credit Reserve Ratio at 27.5 percent.

Employment in the manufacturing sector contracted for the first time after 34 consecutive months of increase while the demand in the sector also suffered first decline in 33 years, according to the recent report by the CBN.