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CBN plans monetary easing to tame lending rates


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Nigeria

 

Image:Central Bank of Nigeria

 

 

 

April 12  2012

 

The Central Bank of Nigeria (CBN) has said that the tight monetary policy it adopted last year to rein –in inflation would be mixed with easing measures with hopes that this could help moderate the cautious approach to lending by the banks, thus further easing credit expansion to the productive sectors of the economy.

The CBN is concerned that the effects of the continued liquidity squeeze on the Nigerian economy, as a result of this tight stance, are expected to linger through 2012 as banks re-adjust their portfolios to accommodate prevailing liquidity conditions and may consequently, push up lending rates.

Interest rates in 2011 exceeded their levels from the previous year period, as the CBN shifted from quantitative easing in September 2010 to monetary tightening, in fear of the apparent threats of inflationary build-up.

The apex bank steadily reviewed rates upward, raising its benchmark rate, the Monetary Policy Rate (MPR) from 6.25 to 12.0 per cent. It also increased the Cash Reserve Ratio (CRR) to 8.00 per cent from 2.00 per cent.  As a result of the restrictive monetary policy stance through higher MPR and increased mop-up activities in Open Market Operations (OMO), interest rates rose generally.  The average term deposit rates rose by 0.33 percentage points, to 5.93 per cent at December 2011, over 5.60 per cent, end-December 2010.

Prime and maximum lending rates rose by 0.62 and 1.81 percentage points to 16.62 and 23.66 per cent, respectively, during the review period. Consequently, the spread between the average term deposit and the maximum lending rates widened to 17.73 percentage points from 16.91 percentage points at end-December 2010. In its guidelines on Monetary, Credit, Foreign Trade and Exchange Policy for 2012/2013 Fiscal Year, the apex bank confirmed that  due to its restrictive monetary policy stance through higher MPR and increased mop-up activities in Open Market Operations (OMO), interest rates rose generally. Consequently, lending, it noted was depressed as liquidity conditions became tight until the purchase of the AMCON bonds from the intervened banks, following the suspension of the reserve averaging framework.

“However, given the increased liquidity injection from the exercise and the need to rein in inflation expectations, the regime of monetary tightening continued, while banks cautiously approached lending.

“The effects of the continued liquidity squeeze are expected to linger through 2012 as banks re-adjust their portfolios to accommodate prevailing liquidity conditions. Consequently, lending rates are expected to rise,” the CBN noted in guidelines posted on its website.

But it assured that the primary objective of its monetary policy in 2012/2013 shall be the maintenance of price stability in compliance with the mandate in its Act and shall therefore endeavour to achieve the overall inflation objective of government during the programme period, through effective liquidity management; with a view to creating an environment conducive for sustainable growth.

The strategy of monetary policy, it stated, shall continue to be monetary targeting, as it further pledged to maintain the close monitoring of broad money supply (M2) alongside other key monetary aggregates. Consequently, the apex bank projected that broad money would grow by 24.64 and 18.38 in 2012 and 2013, respectively.

It also assured that monetary policy shall continue to be proactive, involving the discretionary management of the CBN’s balance sheet, with a view to ensuring that the operating variables are within programme targets. The MPR, it noted in the guideline, shall remain the anchor rate, which is expected to drive other interest rates in the economy.

Consequently, the MPR shall be adjusted periodically in response to prevailing liquidity conditions and the stance of monetary policy. However, the apex bank is particularly worried that fiscal sustainability remains a major concern, particularly the lack of diversification of the economy due to excessive dependence on oil as a major source of government revenue.

It raised concern that the continued drawdown in the Excess Crude Account to finance current consumption has accentuated inflationary pressures and constrained the efficacy of monetary policy in taming inflation and moderating swings in interest and exchange rates.

 

 

 

 

 

Article credit: Businessday Newspaper

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Updated 7 Years ago
 

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