THE Central Bank of Nigeria (CBN) on Tuesday announced a reduction of the Monetary Policy Rate (MPR), which determines the interest rate on loans to Small and Medium Scale Enterprises (SME’S) from 12.5 per cent to 11.5 per cent.

Godwin Emefiele, the CBN governor, announced this decision on Tuesday at the end of the MPR Committee two-day meeting.

This indicates that the interest rates on getting access to a loan will reduce by 1 per cent.

Emefiele said the Committee retained the cash reserve ratio at 27.5 per cent because it agreed that the recent inflationary pressures were driven by structural policies, not monetary policy.

“In the face of declining economic growth and rise in inflation, the Committee faced a difficult set of policy choices requiring trade-offs and sequencing,” he said.

The committee also retained liquidity ratio at 30 per cent.

According to the CBN Governor, reducing the MPR will put pressure on the deposit money banks to lower cost of credit and the cheaper credit will improve demand, stimulate production, reduce unemployment and support the recovery of output growth.

“Bearing in mind its primary mandate of price stability and the need to support the recovery of output growth, the likely action to address the rise in domestic prices would have been to tighten as it would moderate upward pressure on prices and attract fresh capital to improve the state of the economy and external reserves,” he said.

“It may stifle the recovery of output growth and drag the economy further into contraction,” he added.

However, retaining rates would allow the economy to adjust to the stimulus measures put in place by monetary and fiscal authorities and give the MPC more time to assess the impact on the economy.

A number of central banks have lowered interest rates to support their economies in response to the pandemic and the US federal reserve has said it will keep rates at near zero until at least 2023.