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MPC plans policy tightening to tame rising trend in inflation

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has said it would evolve a tightening policy to tame the nation’s rising inflation.

The MPC noted that Nigeria’s inflation rate inched up in December 2019, which is above the upper band of the 6-9 per cent threshold.

In a report released on Thursday as the outcome of the MPC meeting, held between January 23 and 24, the CBN explained that the relatively fall of the equities market indices points to waning investor confidence in equity in preference for coupon rate on bonds.

It said raising the policy rate, could be a policy choice to reverse the tendency and attract more foreign portfolio investments.

The apex bank added that the risks to the level of reserves persist as prices of oil futures remain uncertain.

On the need for the policy, it further explained that policy tightening would enhance the accretion to foreign reserves and attain relative stability in the foreign exchange market.

“Moreover, raising rates would reinforce the stability of the 11 foreign exchange market as an upswing in the rate will inhibit demand pressures in the market through a decline in money supply,” it said.

While stressing that though tightening would limit the ability of Deposit Money Banks (DMBs) to create money, CBN said it would ultimately lead to a reduction in money supply and curtail their credit creation capabilities.

This, it said, would eventually lead to rising cost of credit and credit risk as DMBs re-price their risk assets.

According to the MPC, the aggressive pursuit of the current loan-to-deposit ratio policy thrust would continue to help to catalyze credit growth and positively impact growth and prices.

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On the decision to loosen, the MPC members noted during the meeting that the relative stability in the foreign exchange market provides confidence to foreign investors.

They also agreed that there was no immediate concern that loosening would exert pressures on the foreign exchange market in the near term

The MPC noted that an accommodative monetary policy stance would motivate banks to lend to maintain their profit performance and would result in decline of the overall cost of production.

“This would further affirm the Bank’s support for stimulating output growth, adding that the downside to loosening is that it could amplify inflationary pressures as the economy experiences increased liquidity surfeit,” CBN said.

“An interest rate reduction would increase money supply and exert pressure on the exchange rate. Moreover, an accommodating monetary policy stance may not necessarily lower the retail lending rate, as interest rates are generally sticky downwards.”

The MPC acknowledged that a mix of heterodox monetary and financial policy measures have recently been deployed by the Bank.

The Committee noted the slow pace and low rate of economic growth as real Gross Domestic Product (GDP) growth of 2.10, 2.12 and 2.38 percent in Q1, Q2 and Q3 2019, respectively; being below the population growth rate, still needs sustained policy support.

The MPC concluded that maintaining monetary policy rate at its present level is essential for sustainable support to growth before any possible adjustments.

This will enable policy to react suitably to developments as they occur in the near term, the MPC added

According to the MPC members retaining the current policy position provides avenues to evaluating the impact of the heterodox monetary and financial policies to support lending by the banking industry without altering the policy rate.

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On the downsides to holding, the Committee noted that it would reduce the speed of economic recovery relative to loosening, exert a drag on output growth, as DMBs continue to utilize bonds sales instead of engaging in financial intermediation to the private sector.

In view of the foregoing, the Committee by a decision of 9 members, voted to alter the Cash Reserve Requirement (CRR) by 500 basis points from 22.5 to 27.5 per cent, while leaving all other policy parameters constant.

Two members voted to leave all parameters constant.

In conclusion, the MPC voted to: Change the CRR from 22.5 to 27.5 per cent;Retain the MPR at 13.5 per cent;Retain the asymmetric corridor of +200/-500 basis points around the MPR;Retain the Liquidity Ratio at 30 per cent.

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