The monetary policy committee of the Central Bank of Nigeria (CBN) has announced that the monetary policy rate (MPR), which determines interest rate, will be reduced by 100 basis points from 12.5 percent to 11.5 percent.
Godwin Emefiele, the CBN governor, announced the committee’s decision on Tuesday at the end of its two-day meeting.
This means that the cost of getting a loan will reduce.
Emefiele said the committee retained the cash reserve ratio at 27.5% because it was of the opinion that the recent inflationary pressures are driven by structural policies, not monetary policy.
The committee also retained liquidity ratio at 30%.
According to Emefiele, reducing the MPR will put pressure on the deposit money banks to lower cost of credit and the cheaper credit will improve demand, stimulate production, reduce unemployment and support the recovery of output growth.
Explaining the committee’s decision, the CBN governor said: “Bearing in mind its primary mandate of price stability and the need to support the recovery of output growth, the likely action to address the rise in domestic prices would have been to tighten as it would moderate upward pressure on prices and attract fresh capital to improve the state of the economy and external reserves.
“It may stifle the recovery of output growth and drag the economy further into contraction.”
On the other hand, holding rates would allow the economy to adjust to the stimulus measures put in place by monetary and fiscal authorities and give the MPC more time to assess the impact on the economy.
A number of central banks have lowered interest rates to support their economies in response to the pandemic and the US federal reserve has said it will keep rates at near zero until at least 2023.