Monetary Policy: CBN to Maintain Focus on Credit


By Emele Onu, 06.27.2010

As the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) meets next week to review the economy in the past two months and take key decisions on the way forward, matters of credit expansion to the real economy will continue to be the overriding consideration, it was gathered last week.



CBN’s Director of Research, Charles Mordi, disclosed the apex bank’s position at a seminar on the 2010 Budget in Lagos.He also said that adjustments in key ratios relevant to the regulation and soundness of the banking system would consider primarily how such ratios would enhance the capacity of banks to extend credit to the private sector.



“The computation of minimum cash reserve ratio will continue to be based on the difference between individual banks’ total deposit liabilities and their domiciliary accounts, while the Minimum Liquidity Ratio will be maintained at 1 per cent in response to the need to expand credit to the real sector,” Mordi said while presenting a paper on “Macroeconomic Framework and Policy Consistency: Budget 2010 in Perspective.”



The CBN official, who also noted :“Interest rate management is critical for the effectiveness of monetary policy and will be market-driven with proactive adjustments to the Monetary Policy Rate (MPR) to reflect the prevailing market conditions.”Some analysts had expressed the view that with the fall in Nigeria’s year on year (yoy) inflation rate to 11 per cent in May from 12.5 per cent the previous month, the CBN, which has anchored monetary policy on credit expansion at a low interest rate to the real economy, will have no cause to increase the MPR by the time the MPC meets next week.  The MPR, which is the benchmark interest rate in the economy, has remained at 6 per cent since July 2009.



Inflation rate rose from 12 per cent in the last quarter of 2009 to stabilise at 12.3 per cent in January and February 2010 but declined to 11.8 per cent in March 2010 and rose again to 12.5 per cent in April. This had created  the impression in some quarters that the CBN might raise the MPR by about 100 basis points to deal with the threat of inflation.But an Economist and analyst with the Lagos State University, Dr Casmir Ogbodu, said: “With inflation slowing down, the CBN is getting the breathing space it requires to maintain the MPR at the prevailing rate.”



Head, Africa Research, Standard Chartered, Razia Khan, was quoted recently to have said:   “With inflation seemingly better behaved just ahead of the next MPC meeting, this reinforces our expectation that policy rates will be kept unchanged.“But it will not make the worries around future inflation risks disappear entirely as the central bank will still be concerned about future risks if budget plans in Nigeria remain ambitious and there is still ample liquidity around.”







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