The Monetary Policy Committee of the Central Bank of Nigeria on Tuesday announced a tightening of the monetary policy stance by increasing the Monetary Policy Rate by 100 basis point from 11 per cent to 12 per cent.

It also increased the Cash Reserve Ratio by 250 basis points from 20 per cent to 22.5 per cent, while retaining the liquidity ratio at the rate of 30 per cent.

However, the committee narrowed the asymmetric corridor from +200 and -700 basis points to +200 and -500 basis points.

The MPR is the anchor rate at which the CBN, in performing its role as lender of last resort, lends to Deposit Money Banks to boost liquidity in the banking system.

By this increase of 100 basis points in the MPR, the cost of funds to the banking system from the central bank will now increase, thus leading to a rise in lending rate from commercial banks to businesses.

Addressing journalists shortly after the two-day MPC meeting held at the central bank headquarters in Abuja, the CBN Governor, Mr. Godwin Emefiele, said the committee expressed concern that the excess liquidity in the banking system was contributing to the current pressure in the foreign exchange market.

This, according to him, has a negative impact on consumer prices, with the inflation rate rising to its highest level in three years at 11.38 per cent.

The governor said at 11.38 per cent, the inflation rate had breached the CBN’s policy reference band of six per cent to nine per cent.

He lamented that previous efforts to reflate the economy in order to spur growth had not elicited the required response from the DMBs as there had been a resurgence in liquidity in the interbank market.

Emefiele said, “The committee, in its assessment of relevant internal and external indices, came to the conclusion that the balance of risks is tilted against price stability. The MPC, therefore, voted to tighten the stance of the monetary policy. One member voted to retain the CRR at 20 per cent, while another member voted to retain the current width of the asymmetric corridor.”

Concerned about the need for low interest rates to support growth and employment, the governor said the committee urged the CBN to explore innovative ways of ensuring unhindered flow of credit at low cost to key growth sectors.

The CBN governor stated that despite the accommodative monetary policy stance embarked upon by the apex bank since July 2015 by lowering the CRR and MPR to free up more funds, banks had yet to access these funds.

He said, “The bank (CBN) had adopted accommodative monetary policy since July 2015 in the hope of addressing growth concerns in the economy, effectively freeing up more funds for the DMBs by lowering both the CRR and MPR, with excess liquidity arising from the lower CRR warehoused at the CBN.

“The DMBs were to access these funds by submitting verifiable investment proposals in the real sector of the economy. The funds have not impacted the market yet because the CBN is still processing some of the proposals submitted by the DMBs.

“In the first episode of easing, which resulted in injecting liquidity into the banking system, the DMBs did not grant credit as envisaged.

“The cautious approach to lending by the banking system underpinned by a strict regulatory regime conditioned by the Basel Committee in the post global financial crisis era has further alienated investors from access to credit as banks prefer to build liquidity profiles in anticipation of government borrowing.”

He  also said, “The delay in the passage of the 2016 budget has further accentuated the difficult financial condition of economic agents as output continues to decline due to low investment arising from weak demand.”

The governor said the sluggish growth in output was partly attributable to certain fiscal uncertainties.

This, he noted, had inadvertently hampered investment spending and flows as well as led to slow growth in credit to the private sector in preference to high credit growth to the public sector.

He lamented that the challenges facing the economy were part of the reasons why businesses were currently finding it difficult to service their loan obligations to banks.

The development, according to him, has led to the resurgence of non-performing loan portfolio, with the banking sector recording about five per cent NPLs as against the three per cent recorded few months back.

Emefiele said the committee of governors would be meeting with the affected banks to discuss the type of loans that had been granted that led to the rising NPLs, with a view to reducing them.

The governor also denied claims that the CBN planned to convert the $20bn in bank customers’ domiciliary accounts into naira, stating that such had never been considered by the apex bank.

He said, “There are customers who have $20bn in domiciliary accounts and I want to use this opportunity to say that those funds are not idle contrary to what was made people to believe. Those funds on the balance sheet are funding certain assets on the other side of the balance sheet. The $20bn is a liability on the balance sheet and so, there is nothing like it being idle.

“I need to reiterate the fact that there is no intention and there will never be that intention. It is not within our view to begin to start to convert people’s domiciliary account balance and I wish to say that this should be taken very seriously.”

When asked why the apex bank had yet to harmonise its foreign exchange policy, the governor said this would be done after officials of the bank had met all the relevant stakeholders in the financial system.

Emefiele stated, “The issue is to improve the foreign exchange supply in the foreign exchange market. The price of crude oil is improving and we hope to improve on the supply.”

Financial and economic experts, in separate interviews with one of our correspondents, said  that the latest move by the MPC would further slow the growth of the economy.

The Managing Director and Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, said, “I think it is a move in the right direction. But it doesn’t address the absence of an exchange rate policy. It addresses inflationary fears, but it doesn’t address the exchange rate policy. So, I think there is still more action expected.”

“There is some wiggle room. The story is credible. It is clear. But the absence of an exchange rate policy makes the story slightly inconsistent,” Rewane added.

The Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, said the MPC was faced with declining growth rate and increasing inflation rate, adding that the decision would not resolve the issue of rising inflation.

He stated, “The increase in inflation rate is not driven by banking system liquidity or credit expansion. So, increasing the CRR and MPR will not reduce inflationary pressure. Inflationary pressure is coming from the price of petroleum products, increase in electricity tariff and then the pass-through effect of the increased exchange rate at the parallel market.”

The Head, Research and Investment Advisory, Sterling Capital, Mr. Sewa Wusu said, “Raising the interest rate will mean that even if banks were to lend, it will be at higher rates, and that will stifle investment. I think this policy is somehow counter-productive.

The Head of Investment Research, Afrinvest West Africa Limited, Mr. Ayodeji Ebo, said Afrinvest Research had projected an increase in the MPR to 12 per cent in its 2016 outlook, adding, “But we are particularly surprised that the MPC would be taking the tightening course this early into its easing mode.”

Ebo said the suggestion that increase in banking system liquidity was fundamentally driving the pressure on exchange rate was not also subject to fact as “we have continued to see high subscription at CBN interbank auctions despite intermittent OMO (open market operation) mop-ups conducted, and exchange rate certainty plays as much impact on foreign capital inflows as interest rate competitiveness, and the current tightening is too mild to compensate for the exchange rate risk.”

Punch