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CBN’S unconventional silence on interest rate

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Views expressed and positions taken on any economic policy by Financial Derivatives Company’s Managing Director, Mr Bismark Rewana cannot be ignored. He has paid his due. Prior to the much-delayed first meeting in the year of the nine members of the Monetary policy Committee (MPC) of Central Bank of Nigeria (CBN), Rewane had intuitively expected a one per cent reduction in the interest  rate which currently stands  at 14 per cent and stated that he did expect any change in the other key economic indicators.

His intuitive expectation on the need for a reduction in interest rate is obviously understandable. The Mr Godwin Emefiele–led CBN has been working had to fix the economy that exited recession at the first quarter of last year.

The Apex Bank’s target is within a range of six to nine per cent. Since November last year, MPR has stood at 14 per cent, Cash Reserve Ratio (CRR), 22.5 per cent, and Asymmetric window, +200 basis point and -500 basis point of MPR.

When the interest rate is lower, companies can borrow at cheaper rate, grow businesses and employ more labour. Conversely, a high interest rate with low inflation regime constraints companies from borrowing for expansion. Many of them may embark on high cost control which may lead to spinning off of some businesses with attendant effect of downsizing labour.

Therefore, every change in the Minimum Rediscount Rate (MRR) has spillover effects on investment decisions for both domestic and foreign portfolio investors.

The Apex Bank is basking in euphoria that its tight monetary policy is designed to keep macroeconomic key indicators at comfortable zone, encourage saving and de-risk bank lending to the private sector to boost economic expansion.

Interest rate affects our daily lives and the health of any economy. It is a crucial macro- economic variable for growth and development. Interest rate affects our personal lives by guiding us whether to consume or save. Investors in the financial market have waited since late last year for the CBN’s position on the interest rate to enable them adjust their asset allocation.

The Apex Bank can keep a high interest rate when an economy is doing well. But Nigeria’s economy is beginning to slow down, hence, lower interest rate becomes an option to stimulate business and employment. At the moment, Nigeria is playing golf with high interest rate and slow growth. This can impede economic growth.

Sola Oni, Lagos.

The post CBN’S unconventional silence on interest rate appeared first on Tribune.

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