- CBN’s Unconventional Silence on Interest Rate
Views expressed and positions taken on any economic policy by the Managing Director, Financial Derivatives Company, Mr Bismark Rewane, cannot be ignored. He has paid his due. Prior to the much-delayed first meeting in the year of the Monetary policy Committee of the Central Bank of Nigeria, Rewane had intuitively expected a one per cent reduction in the interest rate which currently stands at 14 per cent and stated that he did expect any change in the other key economic indicators.
His intuitive expectation on the need for a reduction in the interest rate is obviously understandable. The Godwin Emefiele-led CBN has been working had to fix the economy that exited recession at the first quarter of last year. The Monetary Policy Rate had peaked at 18.7 per cent on downward trend for almost 11 months to 15.4 per cent.
The apex bank’s target is within a range of six to nine per cent. Since November last year, the MPR has stood at 14 per cent, the Cash Reserve Ratio, 22.5 per cent, and the Asymmetric window, +200 basis point and -500 basis point of the MPR.
Every quantum of change in interest rate has implications particularly on the financial market and the economy in general. The apex bank worldwide changes interest rate upward or downward to ensure maximum employment, price stability and steady economic growth.
When the interest rate is lower, companies can borrow at a cheaper rate, grow businesses and employ more labour. Conversely, a high interest rate with low inflation regime constrains companies from borrowing for expansion. Many of them may embark on high cost control which may lead to spinning off of some businesses with attendant effect of downsizing labour.
There is an inverse relationship between the money market and capital market. A rise in interest rate spurs activities in the money market instruments as speculators take advantage of higher interest rate by moving their funds from the stock market to money market to invest in instruments such as Treasury Bills and Government Bonds.
The same speculators would embark on flight for safety by withdrawing their funds at a click of button from fixed deposits or fixed income securities to the stock market once the market is bullish. Speculators are high risk takers as they can win all or lose all. Nonetheless, they are key drivers in the capital market as they provide liquidity. But they need policy direction for enhanced calculated risk.
Therefore, every change in the Minimum Rediscount Rate has spillover effects on investment decisions for both domestic and foreign portfolio investors. So, the current MRR at 14 per cent while inflation is at 14.33 does not send comfortable signals. This perhaps explains why Rewane’s expectation was the need for the CBN to reduce the interest rate by one per cent ahead of the historic MPC meeting recent.
The apex bank is basking in the euphoria that its tight monetary policy is designed to keep key macroeconomic indicators at a comfortable zone, encourage savings and derisk bank lending to the private sector to boost economic expansion.
Emefiele had technically defended the decision of the MPC to hold the MPR at 14 per cent in the last 18 months. He has an answer to why other variables also remain fixed, saying: “On the argument to hold, the committee believes that key macroeconomic variables have continued to evolve in a positive direction in line with the current stance of macroeconomic policy and should be allowed more time to fully manifest.” Perhaps, this largely accounts for the decision of the “nine wise (wo)men” to retain the MRR and indeed other indicators at the 2017 level.
Prior to the MPC’s meeting, the President, Chartered Institute of Stockbrokers, Mr Oluwaseyi Abe, had lamented the effect of a prolonged delay of the meeting on the financial market. According to him, it had made foreign and domestic investors to rely on guesswork about the government’s direction on the interest rate. Abe’s position, which is corroborated by one of his colleagues on the Institute’s Council, is justifiable.
Interest rate affects our daily lives and the health of any economy. It is a crucial macroeconomic variable for growth and development. Interest rate affects our
personal lives by guiding us whether to consume or save. Investors in the financial market have waited since late last year for the CBN’s position on the interest rate to enable them adjust their asset allocation.
Every announcement by the MPC has
therefore become significant as absence of policy direction on interest rate enthrones speculative decisions. Against all expectations and permutations, the MPC members rose from the recent meeting only to announce that the interest rate and other key indicators had been retained. Unconventional silence on the interest rate will have dire consequences on corporate growth.
The apex bank can keep a high interest rate when an economy is doing well. But Nigeria’s economy is beginning to slow down, hence, lower interest rate becomes an option to stimulate business and employment. At the moment, Nigeria is playing golf with high interest rate and slow growth. This can impede economic growth.
On the stock market, the impact of high interest rate is obvious. Investors who love short time horizon sometimes move their funds to bonds in order have a better yield. At a period like this, the silence of the MPC members on the need for a downward review of interest is not golden. The financial market is awaiting the apex bank’s immediate intervention. Unconventional silence of the CBN and its MPC’s members may be a costly gamble.
Oni, a financial journalist and chartered stockbroker, is the CEO, Sofunix Investment and Communications.