Thursday, 28 March

CBN to keep interest rate at 12.50%; lending cut to provide little support to economy

Business
Muhamudu Buhari

The CBN cut its rate by 100 basis points (bps) to 12.50% in May, signalling a greater focus on stimulating economic growth despite rising inflation.   

According to Fitch Solutions,  the latest rate cut and measures made to incentivise bank lending will provide little support for the real economy. 

"We forecast an acceleration of average inflation from 11.4% in 2019 to 13.7% in 2020, which alongside uncertainty due to the pandemic will weigh on credit demand and economic activity."

Headline inflation remains well above the CBN’s 6.0-9.0% target range; it accelerated for the eighth consecutive month, to 12.3% year-on-year, in April 2020 due to supply chain disruptions driving the growth of food and non-food prices.

Fitch Solutions said: "We had expected this uptrend in price growth to continue following a devaluation of the naira in March, and held the view that the decline in foreign currency reserves over recent quarters would deter the CBN from cutting interest rates in order to limit depreciatory pressures on the currency.

"However, the economy’s 2020 prospects have weakened significantly due to the Covid-19 pandemic weighing on oil exports and domestic business activity.

In turn, the CBN Governor Godwin Emefiele wrote in the policy statement that “the MPC felt that a hold may indicate that the monetary authorities are insensitive to prevailing weak economic conditions. 

”Our core view is for CBN’s policy rate to be held at 12.50% through to the end of 2020. However, we forecast a 3.9% contraction of real GDP in 2020, and believe the fragile state of the economy and the CBN’s dovish pivot leaves risks to our rate forecast weighted to the downside."  

Nigerian banks operating in Ghana are Access Bank, GT, FBN, First Atlantic Bank, UBA and Zenith.

Source: classfmonline.com