How MPC left policy rates unchanged to mitigate COVID-19 impact on Nigerians

By Charles Abuede

• In line with analysts’ expectations
• Says aggressive policy stance will worsen inflation in the economy

The 277th convention of the Central Bank of Nigeria’s Monetary Policy Committee (MPC) held on Monday and Tuesday in Abuja in the light of lingering uncertainties associated with the COVID-19 pandemic, stagflation with the existence of unhealthy inflation numbers, economic recession, saw the committee retain the policy rate at 11.50 per cent for the second time since the last cut from 12.50 per cent at the September 2020 MPC meeting.

Godwin Emefiele, the CBN Governor, who read out the policy committee’s communiqué at the CBN headquarters in Abuja on Tuesday, stated that the decision comes from the considerations of the committee that the apex bank pursue the systematic synchronization of monetary and fiscal policy accommodation through its developmental finance initiatives, aimed at mitigating the impact of the COVID-19 pandemic on Nigerians.

According to the CBN Governor: “Whereas there may be wisdom in loosening, given that the impact of the global Covid-19 pandemic has resulted in constrained activities, disruption to supply chain and suppress aggregate demand, an accommodative stance may be required to stimulate credit expansion and boost recovery in the short term.”

According to him: “An expansionary policy would enable the monetary authorities to convince the financial institutions to reduce loan pricing and defer interest and principal repayments to critically affected obligors in a sustainable manner while an aggressive expansionary stance may worsen both inflation and the negative real interest rate, thereby resulting in negative consequences on the exchange rate”.

The decision by the committee was, however, in line with the expectations of economic analysts with better understanding of the matter and who had expressed their positions on the expected outcome from the MPC’s meeting that the committee will keep rates constant based on the burgeoning need to stimulate economic activities and create jobs, in a bid to boost a quicker economic rebound and also, the need for government to foster closer coordination of monetary and fiscal policies to accelerate growth in the country. Also, they further revealed that as rates are kept unchanged, the interest in the equities market is expected to be continual as low yield in the fixed income market is expected to linger.

Furthermore, the CBN maintained by a unanimous vote the asymmetric corridor of +100/-700 basis points around the MPR; retained the CRR at 27.5 per cent; and also retained the Liquidity Ratio at 30 per cent. Although, the policy committee was of the view that this will be of great benefit as it will allow current policy measures to permeate the economy while observing the trend of developments.

Meanwhile, in considering the recent spike in the coronavirus infections, the policy committee further stated that a wholesome lockdown of the economy may exacerbate the current realities of stability resulting from the gains of the stimulus provided by the government in 2020. Furthermore, the committee emphasized on the need for the apex bank to intensify its efforts in the targeted credit facility to household, SMEs, the health sector, as well as the agricultural and manufacturing sectors, which would not only boost consumer spending but result in manufacturing output, thereby positively impacting the GDP of the country.