Godwin Emefiele, the (Central Bank of Nigeria (CBN) governor, said on Tuesday he favoured a gradual reduction in interest rates over the next five years, but inflation risk meant there was no room to ease policy immediately.

Emefiele, leading the first Monetary Policy Committee (MPC) meeting since he was sworn in last month, flagged “underlying inflationary pressure” as one reason to be cautious and keep the policy rate at 12 percent, a level unchanged for the past two years.

Consumer inflation in Africa’s largest economy rose for the fourth straight month in June to hit 8.2 percent, a 10-month high – within the bank’s current target of between 6 and 9 percent, but trending upwards due to higher food prices.

“All measures of inflation have witnessed a progressive upward trend since February … this trend should be monitored closely to achieve a reversal.”

Emefiele stayed the course of his respected predecessor, Lamido Sanusi – a critic of government corruption who was suspended from the bank by President Goodluck Jonathan in February – in keeping monetary policy tight.

The MPC also kept the corridor for borrowing from or lending to the bank at 200 bps plus or minus its benchmark rate, and retained banks’ liquidity ratio of 30 percent. The private sector cash reserve requirement (CRR) stays at 15 percent, while the public sector CRR remains at 75 percent.

The rate decision was announced after financial markets closed.

An analysts’ view
Emefiele said the bank was satisfied that the economy was relatively stable and that it welcomed a moderation in core inflation.

Emefiele at his first press conference last month said he would seek to gradually reduce rates, in comments that sent bond yields and the naira down against the dollar.

But in an interview with Reuters the following day he clarified that there could be no rate cut until after the February 2015 presidential elections, when fiscal spending has a chance of getting under control.

Accordingly, at Tuesday’s MPC meeting his plan to seek lower rates at a later date was aspirational, and he did not indicate whether a rate cut before the election was a possibility. He said the committee was concerned about the impact of high interest rates on “employment levels, wealth creation and the growth of businesses.”

However, this had to balanced against the risk posed to the naira by increased government spending ahead of 2015 elections and by a possible further tapering of the U.S. Federal Reserve’s bond-buying programme again hurting portfolio flows, he said.

“We are going to pursue a gradual reduction in interest rates. That is a five-year agenda,” Emefiele said.

“We are going to continue to monitor the situation and if we see that the macroeconomic variables are moving in a direction we expect, you’ll begin to see the reversal of interest rates in the direction of going low.”

Investors have feared that the departure of Sanusi would mean government interference in monetary policy.

Sanusi’s tight policy was opposed by Finance Minister Ngozi Okonjo-Iweala because of its impact on businesses.

At the same time, analysts said that while Emefiele favoured gradual policy easing he would also face continued pressure from fiscal authorities for the central bank to tackle the effects of high government spending by tightening policy.

Source: Businessday
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