WHY WE RETAINED TIGHT MONETARY POLICY — CBN
THE Central Bank of Nigeria, CBN, has said that the despite pressures to loosen its monetary policy stance the Monetary Policy Committee, MPC, decided to retain the tightening measures in view of its success so far and threats surrounding expansionary measures. In light of this, the MPC, yesterday, voted unanimously to hold monetary policy rates constant at 14 per cent; retain the asymmetric corridor of +200/-500 basis points around the MPR; retain the Cash Reserve Requirement, CRR, at 22.5 per cent; and retain the Liquidity Ratio at 30 per cent.
These rates have been in place for almost two years now surviving about seven MPC meetings. Addressing the media yesterday on the outcome of the MPC meeting, Governor of CBN, Godwin Emefiele, stated: “The MPC considered the options to loosen, hold or tighten. “The Committee continues to hold the view that although loosening would encourage the flow of credit to the real sector, help in reduction of the aggregate cost of credit and spur business spending and investment, thereby reinforcing the CBN’s support for output growth and economic recovery, it, however, believed that doing so will reverse more rapidly, the gains of price and exchange rate stability achieved so far given the liquidity impact that would entail.
“The ensuing liquidity will exert pressure on the exchange rate in the light of increased capital flow reversals arising from monetary policy normalisation by the US Fed. This would further depress the Capital Market. “As for tightening, the MPC hold the view that, while tightening will strengthen the stability of the Foreign Exchange Market because of its dampening effect on the demand for foreign exchange, it was however convinced that this would simultaneously dampen investment growth, widen the output gap, depress aggregate demand and weaken output growth.
“The MPC recognises the fact that it had held the policy rate and other policy parameters constant over the last several meetings. The Committee underscores that by holding its policy position constant, it has confidence in the various policies and administrative measures deployed by the CBN which have resulted in the moderation in domestic price levels and stability in the foreign exchange rate.
“Thus, a hold position is an expression of confidence in the policy regime, given the gradual improvements in both output growth and price stability. “On this premise, the downside risks to growth and upside risks to inflation appears contained”.