Nigeria’s Central Bank’s surprised deeper easing of its benchmark interest rate by 100 basis points to 11.5% from 12.5% in May 2020 is seen to translate to more liquidity for banks and further drop in savings rate.
After a two day meeting in Abuja, the CBN governor, Godwin Emefiele, announced the adjustment of the asymmetric corridor around the monetary policy rate (MPR) to +100bps/ - 700bps from (+200bps/ - 500bps) previously.
This is in-spite of recent pressure on inflation caused by higher food prices and the expectation of further pressure in the near-term as power sector and fuel subsidy reforms get underway.
Nigeria’s inflation rate rose to 13.22% in August 2020, highest recorded in 29 months, since March 2018, when it stood at 13.24%.
“This was a deeper easing than we would have expected at this stage”, Razia Khan, managing director, Chief economist, Africa and Middle East Global Research, Standard Chartered Bank, said.
According to Khan, the action of easing policy while inflation is still accelerating sends – at best – a confusing message around Nigeria’s willingness to re-open the FX market. With little additional intentions, the CBN appears to have stepped back from action that might have led to more immediate impact on inflation expectations.
The effects of the cut will be to push the rate on the standing deposit facility (the lower corridor around the MPR) even lower, to 4.5% (from 7.5% earlier)
Bismark Rewane, managing director, Financial Derivatives Company ltd., Said, “My view is that there will be some stalking of inflationary pressures. I think that the Marginal Propensity to Save (MPS) will be reduced, so national savings to GDP will come down and the international flows will also be negatively impacted.
“The CBN was between a rock and a hard place. The most important thing would have been to hold at this time to allow these things to materialize. So, let us see if the reduction will make an impact, but I doubt if there will be a spike in credit. I doubt if it will deal with the unemployment issues in terms of materiality and I doubt if it will ease the currency pressures”, he said.
Business Day, September 23, 2020
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