Use Unconventional Tools to drive economic growth, experts urge CBN

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With the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) keeping rates and other parameters unchanged at its first meeting for the year amid rising inflation and shrinking economy, analysts have said the apex bank will have to use unconventional tools to revive growth in the country.

Members of the committee had unanimously voted to retain MPR at 11.50 per cent while the asymmetric corridor was left at +100/-700 basis points around the MPR. The Cash Reserve Requirement (CRR) was left at 27.5 per cent and Liquidity Ratio was also kept at 30 per

cent.

Commenting on the decision of the MPC to maintain status quo, senior research analyst at FXTM, Lukman Otunuga said, “It is no surprise that the Central Bank of Nigeria (CBN) has left interest rates unchanged at 11.5 per cent.

“While central banks across the globe have embraced

looser monetary policy to defend their respective

economies against COVID-19, the CBN simply does not

have enough breathing room. Given how inflation

remains well above the 6-9% target, a rate cut could fuel

inflationary pressures – ultimately impacting economic

growth.

“But this is where things get tricky. Activity in Africa’s

largest economy has displayed signs of improvement

thanks to the easing lockdown restrictions and rising oil

prices. However, the second wave of infections and

ongoing uncertainty over the vaccine rollout threatens to

sabotage any meaningful recovery. With the coronavirus

pandemic already derailing the CBN from its price

stability mandate, the bank is likely to adopt a wait-and-

see approach for the foreseeable future.

“Should the growth outlook deteriorate due to COVID-

19, the CBN may end up enforcing unconventional tools

in an attempt to revive growth. These include tweaking

the loan to deposit ratio, liquidity ratio, and cash reserve

ratio,” he pointed out.

“The monetary policy committee once again expressed

concern about rising inflation. Indeed, inflation is expected to remain elevated due to supply disruptions created by COVID-19, tightening border restrictions, the increase in VAT, and removal of fuel subsidy. With the

trajectory on inflation pointing north, interest rates are

unlikely to move below 11.5 per cent anytime soon.

Meanwhile, analysts at United Capital Plc said the MPC

leaves all policy rates unchanged with the intention to

give more room for the previous rate cut to run its full course on the economy.

“The above decision was made in light of the intensifying second wave of coronavirus infection, vaccine

developments and the recent rally in oil prices despite sharp rising inflation and exchange rate divergence they stressed.

On implication of key variables, they stated that demand

for short term bills will persist while investors continue to

systematically exit long dated bonds, interest in the

equities market will be sustained, unrelenting pressure

on general price level will continue, although recent

reopening of the border may slow down the pace of

increase and recovery in the local economy will be

sustained with fourth quarter (Q4), 2020 GDP expected

to show further improve.

 

Also, analysts at Cowry Asset Management Limited said,

“The unanimous vote by all members of the MPC to

leave all key rates unchanged, which was in line with our

expectation, was on the back of its optimistic outlook on

inflation rate to moderate, stable crude oil prices and

increase vaccination against coronavirus.”

Nevertheless, Cowry noted that, the possibility of the

MPC to continue to pursue expansionary policy,

especially through the use of MPR, may have been

constrained by the level of liquidity in the financial

system and its attendant adverse effects on exchange

and inflation rates; hence, its new directional approach

to systematically synchronise monetary and fiscal policies

accommodation through developmental finance

initiatives.

Meanwhile, assistant general secretary of the National

Union of Textile, Garment and Tailoring Workers of

Nigeria (NUTGTWN), Comrade Emeka Nkwoala has called

on federal government not to consider the idea of shutting down the economy.

Nkwoala, who made this known in an interview said, the economy has yet to recover from the previous lockdown, urging government to pay more attention to enforcement of COVID-19 protocol, instead of relocking the economy.

We all can see how the effects of the first lockdown have not be resolved. So, government should not toy with the idea to lockdown the economy for the second time.

“The only thing needed is for enforcement of the protocols, that move will help to curb the spread.

Everyone should strictly adhere to Covid-19 protocols because coronavirus pandemic is real and it has to be watch against,” he pointed out.

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