Economist and financial analyst, Dr Muda Yusuf, has reacted to the Central Bank of Nigeria’s, CBN decision to cut the interest rate to 23 percent from 26.5 percent.
In a statement on Tuesday, Yusuf described the apex bank’s decision as a “timely reset.”
Recall that the CBN’s 307th Monetary Policy Committee, MPC meeting cut the interest rate amid two consecutive declines in Nigeria’s inflation rate.
Reacting, Yusuf, who is the Chief Executive Officer of the Centre for the Promotion of Private Enterprise, CPPE, said the magnitude of the adjustment was largely unexpected and represented a significant shift from the prolonged restrictive monetary policy regime.
“It signals an important rebalancing of monetary policy towards supporting growth, investment and economic recovery, while preserving price and financial-system stability.
“It is considered the adjustment timely given the improving inflation trajectory and the growing costs of an excessively restrictive monetary environment.
“There had also been a widening misalignment between the MPR of 26.5%, inflation of about 15.4%, and prevailing money-market rates of around 20%. This weakened the signalling function of the policy rate and raised concerns about the effectiveness of monetary policy transmission.
“The reduction of the MPR to 23% should therefore be viewed not merely as monetary easing, but as an important realignment of the policy rate with prevailing macroeconomic and financial-market conditions.
“It is significant in this context that the CBN characterised the decision as a recalibration or reset of the monetary policy framework,” he said.
Speaking on the impact, Yusuf said the decision to cut the rate was particularly positive for the real sector, where high financing costs had become a major constraint on investment, production, working capital and job creation.
“For many businesses, commercial lending rates have remained at levels that are difficult to reconcile with productive investment, particularly in manufacturing, agriculture, construction, logistics and other sectors with relatively long investment cycles and tight margins.
“The policy adjustment therefore offers an opportunity to reduce the cost of capital, improve business cash flows, stimulate investment and strengthen the productive capacity of the economy,” he stated.