CBN fears rate cut will heighten monetary, fiscal challenges

By Onyinye Nwachukwu

The Central Bank of Nigeria (CBN) has ruled out an interest rate cut in near term, expressing fears that loosening its monetary policy stance at this time could exacerbate fiscal challenges in the economy and worsen inflationary pressure which it is trying to contain.
Moses Tule, CBN Director of Monetary Policy at the Central Bank ofNigeria (CBN) told journal ists on Thursday in Abuja that cutting the Monetary Policy Rate (MPR) which the apex bank has retained at 14 percent and kept for the 10th straight time as well as other benchmark lending would trigger adverse consequences, including the demand for increased wages.

“When you reduce MPR, of course, the way the fundamentals are today, you are going to have the impact of that in other ways; which means the demand is going to be higher on the government to increase wages because inflation will erode the living wage.”

The CBN announced last month that it was waiting to see how far the huge anticipated spending from a combination of the over N9 trillion 2018 budget, expanded monthly disbursements by the Federation Accounts Allocation Committee (FAAC), election spending, among others could have on price stability before deciding on how to move rates.

“We have to choose between having to improve infrastructure and interest rate will come down overtime and the whole economy will benefit or reduce interest rate now and then worsen inflation,” Tule argued,  fielding questions from journalists.

Reacting to concerns that there is no convergence between monetary and fiscal policies, Tule explained that this was not true, and that the fiscal and monetary authorities have rather come up with measures that helped the country restore economic growth.

Citing the nation’s reserves now at about $48 billion, Tule said it was CBN’s tactical foreign exchange measures that led to the steady accretion being celebrated and had provided buffers in the past few weeks to temper the pressure caused by the normalisation of interest rateS in the United States of America. Tule equally commended fiscal measures put in place by the government, particularly the decision to look towards offshore borrowing in order not to crowd out the private sector.
But speaking earlier at the colloquium, and in a panel discussion on “Fiscal and Monetary Policies for Deepening the Capital Market in Nigeria,” Tule had pointed out that one of the derivatives of the structural policies is that “the market determines what the interest rate is.
“When we (CBN) reduce the MPR of course the way the economic fundamentals are today we are going to have the impact of that on higher prices.”

Tule cautioned that the capital market should not expect investment inflows, arguing that “people do not invest where they live from hand to mouth. You can only save to invest when you have leftover.”

“There are lots of funds offshore, those funds are eager to come into the nation,” he rather advised. Speaking at the event, Uche Uwaleke of Nasarawa state University noted that the Nigerian capital market is “challenged by depth and breadth.”

“We need to diversify the capital market. If the big quoted companies go under, that will be the end of the capital market.”

He lamented that Nigeria’s capital Market is “tied to the apron string of foreign investors so much so that if foreign investors sneeze, the market catches cold.”