ANALYSIS: Did Tinubu’s opinion influence CBN interest rate decision?

In a surprise move on Thursday, the Central Bank of Nigeria cut its key interest rate, the Monetary Policy Rate, despite persistently high inflation.

The country’s inflation rate rose for the eighth straight month to 12.34 percent in April from 12.26 percent the previous month, the National Bureau of Statistics said last week.

A few weeks ago, the National Leader of the ruling All Progressives Congress, Asiwaju Bola Tinubu, made a strong case for the lowering of interest rates by the CBN to stimulate economic growth amid the coronavirus pandemic.

“The economic fallout from the coronavirus may present the best, most pressing case for revising the CBN’s high interest rate policy. The undue rates penalise domestic investment and consumer borrowing,” he said.

He said the country must retreat from high interest rates to enable investment borrowing to attain levels that actually increase private-sector growth and job creation.

According to Tinubu, high interest rates, along with an unreliable power supply, combine to form a steep obstacle to sufficient real-sector investment, growth and productivity. 

He said the central banks of all major economies had driven their prime interest rates below one per cent and nearer to zero per cent, adding, “These central banks are lending vast amounts at low rates just to support to their industries and firms.”

Although he admitted that lower interest rates would have some negative short-term impact on inflation and the exchange rate, he said “the economic dislocations caused by the coronavirus serve to mitigate those temporary negative consequences.”

He said much of the pressure it would have on the exchange rate had already been priced into the exchange rate due to capital flight and lower oil prices.

“If there is a time to reduce interest rates, that time is now,” the ex-governor of Lagos State declared.  

The Monetary Policy Committee of the CBN, in its meeting on Thursday, decided by a unanimous vote to reduce the MPR, also known as the benchmark interest rate, and to hold all other policy parameters constant.

Seven members voted for a reduction of the policy rate by 100 basis points, two members by 150 basis points and one member by 200 basis points, according to a communique of the meeting.

The committee cut the MPR by 100 basis points from 13.5 percent to 12.5 percent, the lowest since July 2016. It is the first rate cut since March 2019 and the largest since 2015.

“This is a surprise. Not least because, despite the central bank’s relative optimism on growth, the question is really around the potency of the MPR,” said Razia Khan, chief economist for Africa and Middle East at Standard Chartered Bank, according to Reuters.

Bloomberg reported that only one of the four economists it surveyed expected the central bank to reduce borrowing costs, and the forecast was for only 50 basis points of easing.

Analysts at Lagos-based Financial Derivatives Company, led by Bismarck Rewane, said last week that the front burner issues at the MPC meeting would be how to maintain price stability in a COVID-19 situation, weak external position and slowing growth.

“The most rationale decision to take by the MPC in the current market reality is to maintain status quo on all monetary parameters while evaluating the impact of excess liquidity in the market from intervention funds released,” the FDC analysts said.  

According to them, inflationary pressures are expected to persist in the coming months due to the combined effects of shortages and rising imported inflation as a result of the currency weakness.

Whether or not the CBN action was influenced by Tinubu’s opinion, it is abundantly clear that there is a need to lift the economy out of its current doldrums but whether the interest rate cut will help in achieving that is anyone’s guess.

“The reduction is largely to give an appearance of supporting growth,” Bloomberg quoted Oluwasegun Akinwale, an analyst with Nova Merchant Bank Ltd, as saying.

It “will do nothing to stimulate aggregate demand, as banks are more concerned about systemic risk,” he added.