On Tuesday September 22nd, the Governor of the Central Bank of Nigeria (CBN) Mr Godwin Emefiele announced the reduction of Monetary Policy Rate(MPR) from 12.5 percent to 11.5 percent while retaining a Cash Reserve Ratio (CRR) of 27.5 percent.
The announcement which was made by the CBN governor while presenting the communiqué the 275th Monetary Policy Committee (MPC) meeting said the decision to reduce the MPR was made to sustain economic recovery efforts and to arrest rising inflation. According to the MPC, reduction of MPR would provide cheaper credit to improve aggregate demand, stimulate production, reduce unemployment, and support the recovery of output growth.
Giving reasons for the reduction, the CBN governor said the decisions made were not driven by monetary policies rather as a result of structural policies as the country could enter into recession in the third quarter, and a possible growth in the fourth quarter of 2020 or first quarter of 2021.
The CBN governor called for more aggressive funding of those sectors to promote economic growth, urging commercial banks to respond to the reduction of deposit rate by reducing interest rates on borrowing to encourage borrowing for investments. The management was also directed to ensure that banks respond to lowering of interest on deposit rate by lowering cost of credit to borrowers.
For Nigeria, the coronavirus pandemic brought about oil shocks, increased unemployment and inflation. Air and road transportation, accommodation, food services were worst hit by the lockdown issued to curb the spread of the virus which plunged the country into inflation and recession this year.
Due to loss of jobs, reduced consumer purchasing power and other uncertainties, Nigeria’s GDP contracted at 3.4 percent in 2020, which is down 0.1 percentage points from last month’s estimate, with hopes of growing 2.3 percent in 2021.
The decision to reduce the MPR by 100 basis points to 11.5 percent and adjust the asymmetric corridor to +100/-700 around the MPR shows the governments effort in leading the country towards economy recovery.