Mixed reactions trail CBN‘s MPR cut



 Finanical experts on Tuesday expressed mixed reactions to the 100 basis points slash in the Monetary Policy Rate (MPR) by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN).
The financial experts spoke with the News Agency of Nigeria (NAN) in Lagos on the outcome of the two-day meeting.
NAN reports that MPC, at the end of its two-day meeting, slashed monetary policy rate by 100 basis points to 11.5 per cent from 12.5 per cent.
Mr Godwin Emefiele, the CBN Governor, said the committee retained the cash reserve ratio at 27.5 per cent due to inflationary pressures driven by structural policies.
Emefiele said MPR reduction would put pressure on the deposit money banks to lower cost of credit.
Uche Uwaleke, Professor of Capital Market, told NAN that he expected status quo to be maintained against the backdrop of rising inflation and pressure in the foreign market.
“By lowering the MPR by 100 basis points, the real rate of return has been dragged further into the negative territory, which is likely to affect capital inflows adversely.
“In reducing the MPR, the MPC must have been emboldened by the recent marginal accretion to reserves as well as the approaching harvest season which is expected to rein-in food inflation.
“But the reality is that with foreign investors exiting the country following COVID-19, except crude oil price recovers substantially, I see further pressure in the foreign exchange market,” Uwaleke said.
He said that the gap between the AFEX rate and the parallel market had begun to widen due to increasing demand on the back of resumption in international flights.
Uwaleke said that inflation rate would worsen due to  cost-push factors such as increase in Value Added Tax as well as hike in electricity tariffs and pump price of fuel.
“From experience, a reduction in MPR has little or no impact on economic growth due to poor transmission mechanism.
“Deposit Money Banks hardly reciprocate this gesture through a commensurate reduction in interest rate due to several other costs borne by financial  institutions arising from infrastructure deficit, especially power and insecurity.
“So, empirical studies in Nigeria have shown that a cut in MPR hardly translates to a reduction in lending rates.
“I recognise that a number of Central Banks have cut rates in response to the pandemic.  But most of them have done so because inflation rate was within the target range.
“In the case of Nigeria where inflation rate of 13.2 per cent is well above the CBN’s upper band of  nine per cent, cutting the MPR in a season of rising inflation and foreign exchange market pressure may not be a wise decision.
“The CBN has been supporting economic growth in the last few years using more of unconventional measures in line with its developmental function,” he said.
Uwaleke, also President, Capital Market Academics of Nigeria, said that MPC should have advised CBN to strengthen and scale up its interventions in the various sectors to stimulate the economy instead of rate cut.
Analysts at Cordros Research said that lower rates were intended to compel banks to extend more credit to the real sector.
They noted that banks’ concerns would still depend on asset quality and systemic risk.
“Though lower rates are intended to compel banks to extend more credit to the real sector, we note that banks’ concerns will still lie around asset quality and systemic risk.
“Consequently, we do not expect any significant growth in domestic credit or aggregate demand, especially given the historical ineffectiveness of the MPR in stimulating output and also the negative impact of the pandemic on household income.
“We also note that the CBN did not address the issue of the exchange rate and foreign exchange illiquidity, which in our view, are major hindrances to any meaningful economic recovery,” they said.
On market impact, they said that the fixed income market would likely witness a downward adjustment in yields as a consequence, making the equities market even more attractive and worth a second look.
However, Mr Ambrose Omordion, the Chief Operating Officer, InvestData Ltd., commended the apex bank for the interest rate cut.
Omordion said that it would encourage banks to lend to the real sector, adding that the economy would bounce back if well implemented.
He said that many retail and institutional investors would increase their participation in the equities market due to anticipated low yield in the fixed income securities due to the rate cut. (NAN)