MPR: Expert Rejects Slash, Tells CBN to Maintain Status Quo

Prof Uche Uwaleke

By Tony Obiechina, Abuja A financial expert, Prof Uche Uwaleke has said that the reduction of the Lending Rate (MPR) by the Central Bank of Nigeria (CBN) will adversely affect capital inflows.

The Apex Bank Governor, Godwin Emefiele had on Tuesday after the Monetary Policy Committee (MPC) announced a reduction in the MPR from 12 percent to 11.5 percent.

But reacting to the development in a statement made available to Prompt News Online in Abuja, Uwaleke said, “I had expected the status quo to be maintained against the backdrop of rising inflation and pressure in the forex market.

According to the Capital Market professor,  “by lowering the MPR by 100 basis points, the real rate of return has been dragged further into the negative territory which is likely to affect capital inflows adversely.
“In reducing the MPR, the MPC must have been emboldened by the recent marginal accretion to reserves as well as the approaching harvest season which is expected to rein-in food inflation.

“But the reality is that with foreign investors exiting the country following COVID’19, except crude oil price recovers substantially, I see further pressure in the forex market. If you notice, the gap between the AFEX rate and the parallel market has begun to widen following increasing demand on the back of resumption in International flights.

“Also, given that a lot of cost-push factors are responsible for inflationary pressure including the increase in VAT, hike in electricity tariffs and pump price of fuel, I see headline inflation worsening given all the downside risks.

“From experience, a reduction in MPR has little or no impact on economic growth due to poor transmission mechanism. Deposit Money Banks hardly reciprocate this gesture through a commensurate reduction in interest rate due to several other costs borne by financial  institutions arising from infrastructure deficit especially power and insecurity.

“So, empirical studies in Nigeria has shown that a cut in MPR hardly translates to a reduction in lending rates. I recognize that a number of Central Banks have cut rates in response to the pandemic.  But most of them have done so because inflation rate was within the target range. 

“In the case of Nigeria where inflation rate of 13.2% is well above the CBN’s upper band of 9%, cutting the MPR in a season of rising inflation and forex market pressure may not be a wise decision.

“The CBN has been supporting economic growth in the last few years using more of unconventional measures in line with its developmental function.
“The MPC could have advised the CBN to strengthen and possibly scale up its interventions in the various sectors of the economy which in my view would have been a more effective way to stimulate the economy”.

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