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Analysts dismiss MPR cut as hasty, with zero impact on lending

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By Babajide Komolafe

Financial analysts have described the decision of the Central Bank of Nigeria, CBN, to reduce the Monetary Policy Rate, MPR, to 13.5 per cent as a hasty decision with zero impact on boosting lending to businesses.

Governor, Central Bank of Nigeria (CBN), Mr Godwin Emefiele

Contrary to analysts’ projections, CBN on Tuesday, at the end of its two-day bi-monthly Monetary Policy Committee, MPC, reduced the Monetary Policy Rate, MPR, from 14 per cent to 13.5 per cent, citing the need to signal a new direction towards improved growth.

Analysts, however, opined that the 50 basis points reduction in the MPR will have little or no effect in boosting lending to the private sector.

Citing the looming risk to inflation and the fragile state of the nation’s economy, analysts at Vetiva Capital Management Limited, described the CBN’s decision as ‘hasty own goal,’ which would not lead to increased lending to the private sector as envisaged by the CBN.

They said: “The decision was touted as a key measure to stimulate the economy by reducing the cost of borrowing. Whilst the decision will have an immediate impact on borrowing rates already benchmarked to the MPR, we are sceptical of a significant pass-through to the real sector as bank lending rates are notoriously sticky going down.

“Also, the decision seemingly ignores the looming risks to inflation — an expected increase in liquidity from the frontloading of a late 2019 budget, an increasingly likely review of the multi-year tariff order, MYTO, which has an impact on electricity prices, and most importantly a looming 67 percent   increase in national minimum wage —all of which are likely to push inflation north for the rest of the year.

ALSO READ: Financial experts commend MPC over benchmark rate reduction

“Taking a view from recent history, where the MPC cut rates by 200 basis points in 2015, before subsequently reversing course within the space of a year, a rate HIKE might not be far off the cards, especially given the expected rise in inflation and the current fragile state of the economy.

“Overall, whilst the cut in rate is a signal from the MPC of a stronger pro-growth focus, we believe this decision is ultimately an own goal as the rate cut will do little to stimulate the economy and has the added disadvantage of distracting from its primary objective – price stability.”

Also commenting, analysts at Lagos-based Afrinvest Plc said: “We are not distracted to believe an easing cycle has begun; rather, we think policy stance remains intact considering global interest rate development and the desperation to sustain and retain flows.

“The CBN can always resort to Open Market Operations, OMO, to achieve the objective of attracting and retaining capital flows.”

Analysts at Lagos-based Cowry Assets Management Limited gave a similar opinion. They said: “The MPC’s decision to cut the policy rate by 0.50 percent was engendered by the feeling of sustainability in the level of stability of Nigeria’s macroeconomic indices which were expected to drive growth going forward and the signal by US Fed to leave Fed rate unchanged in 2019 which was expected to redirect foreign inflows into emerging and developing economies like Nigeria.

“We do not expect significant growth in credit to private businesses given the inelastic nature of the relationship between credit to private sector and reduction in MPR.”

FBNQuest analysts also noted: “There are clear limits to the impact of this first change in the policy rate since July 2016. The impact would have been greater if the MPC had cut the cash reserve requirement (CRR) ratio: only one member voted this way, and we note there is lingering suspicion in the committee that such a cut does not feed into loan book growth. The banks are unlikely to pass the full benefit onto their customers. More broadly, the transmission mechanism to real economy and market rates is weak.”

However, Ayo Akinwunmi, Head of Research, FSDH Merchant Bank, opined that the rate, if complemented will appropriate fiscal measures can lead to more lending to the private sector. He said: “It is possible that the yields on fixed income securities may drop slightly further. The cost of servicing the debt of the government may also drop. And with complementary fiscal policies to improve business environment, lending to the private sector may increase. Activities in the commercial paper market may improve with more companies approaching the market.”

On his part, Ayo Otunuga, analyst at FXTM expressed optimism of possibility of more rate cut in the future. He said: “Today’s move by the CBN may open the doors to further rate cuts in the future, especially if macroeconomic conditions continue to improve and inflation cools further.”

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