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The hike in bank rate

Posted by By Sun News on 2006/06/28 | Views: 567 |

The hike in bank rate


At a recent Monetary Policy Committee meeting, the Central Bank of Nigeria (CBN), raised the Minimum Rediscount Rate (MRR) from 13 to 14 per cent.....

At a recent Monetary Policy Committee meeting, the Central Bank of Nigeria (CBN), raised the Minimum Rediscount Rate (MRR) from 13 to 14 per cent. The MRR being the rate at which the CBN lends to the banks, serves as the benchmark rate on which other financial actors in the economy anchor their rates.

Explaining the rationale for the hike, CBN Governor Charles Soludo, said the measure was intended to arrest the problem of excess liquidity threatening domestic prices, with its dire consequences in soar away inflation.

Presenting a general outlook of the economy, the CBN governor revealed that inflation as at the end of April stood at 12.6 per cent - with core inflation at 16.6 per cent. Broad money supply in May stood at 14.1 per cent, persisting at levels higher than the bank's projections. The Gross Domestic Product (GDP) also declined to 2.6 per cent, compared to the corresponding period in 2005 when it was 6.9 per cent. Interest rates, according to Soludo, have been treading downwards, reflecting rising liquidity in the money market, with average lending rate at 16.2 per cent last December, falling to 15.1 per cent by May ending.

The last time the CBN adjusted the rate was in February, 2005. At that time, it slashed the rate from 15 to 13 per cent in response to the general clamour by industries and other stakeholders for a lowering of the interest rates to spur the productive sector. That move had the effect of moderating interest rates, bringing it down at the time to the 17 per cent band.

The latest measure by the CBN is well-intended particularly that the unbridled expansion of money supply - the phenomenon of excess liquidity, which the CBN alluded to, will inevitably lead to inflation and the erosion of the modest gains recorded in recent time, with grave consequences for macro-economic stability.

In the unfortunate situation that the domestic economy remains, as it is - mono-cultural and oil-dependent, with earnings from crude oil cyclically monetized, combined with the public sector's legendary inability to bridle its profligacy, high liquidity will most certainly remain a feature of the economy for some time to come. The potential for unmanageable crisis of liquidity unfortunately also lurks as electioneering draws near, in the build-up to the 2007 polls and in the ambience of the 2006 budget which is regarded as expansionary. Tightening the monetary policy seems to be one challenge CBN would have to brace up to particularly as it squares up to the inflationary pressures from unproductive public sector induced expenditure. The overall efficacy of the current measure and indeed the combination of other instruments that the CBN may likely use will only be judged in the difficult months ahead.

It is welcome news that the Monetary Policy Committee is well poised to deal with the monster of inflation with the resolve to review the trend of developments within the next one month. Equally heart-warming is the promise by the CBN of a new framework for monetary policy.

These are, no doubt, proactive measures that have become imperative given that the economy is still highly susceptible to shocks. However, it is apparent that the greater challenge lies in broadening the productive base of the economy, through appropriate blend of policies that would not stifle domestic production while taming the monster of inflation; policies that would engender job creation, facilitate greater capacity utilization, and ultimately non-oil export drive.

That, in our view, should lie at the heart of current measures.

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