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CBN reduces lending rate to 1%

CBN reduces lending rate to 1% By Gbenga Ogunbufunmi , Assistant Business Editor, Lagos

# Keeps Exchange Rate At 8%

Lending rate has been reduced from two per cent to one per cent, and exchange rate kept at eight per cent by the Central Bank of Nigeria (CBN).

These are part of the decisions reached by the Monetary Policy Committee (MPC) on Tuesday after it reviewed local and global economic conditions in the first two months of the year.

The MPC left interest rate unchanged because of concern that inflation rate may accelerate as government prepares to remove fuel subsidy.

Monetary policy rate was held at six per cent, CBN Governor, Lamido Sanusi, told reporters in Abuja.

The CBN has maintained the monetary policy rate since July last year, but reduced lending rate to commercial banks by two percentage points in November.

This has spurred lending to customers, with credit growth accelerating to an annual 27 per cent in December from 25 per cent the previous month, according to CBN data.

It was growing at a rate of almost 100 per cent in December 2007.

Sanusi explained on Tuesday that the reduction in lending rate is to encourage banks to grant loans.

The MPC noted that the rebound in global economic activity, which started in the second half of 2009, has continued.

The rebound is driven largely by the unprecedented fiscal stimuli in both developed and emerging market economies in the wake of the global financial melt down.

As a consequence, monetary policy had been largely accommodative with interest rates down to record lows in most countries, coupled with the considerable expansion of Central Bank balance sheets.

The key concerns, however, remain the strength and sustainability of the recovery process which is proceeding at varying speeds across the different regions.

The MPC equally noted the continuing rebound in commodity prices, particularly for crude oil, which is helping to support growth in commodity producing regions.

However, the inflation risk of the rise in energy prices appears to be mitigated by low level capacity utilisation, weak private demand, and well-anchored inflation expectations.

Although financial markets have recovered remarkably faster than expected, the MPC observed, financing conditions, especially for businesses and firms, are likely to remain difficult in the near-term as financial institutions remain cautious about credit extension.

Bank lending is likely to remain sluggish given the need to rebuild capital and maintain liquidity, and the possibility of further credit write downs, mostly related to non-performing exposures to commercial real estates and stock markets.

The MPC added that although the bond markets have rebounded, the households, small and medium-size enterprises that have only limited access to capital markets are likely worldwide to continue to face credit constraints, except where public lending programmes and government guarantees are in place.

On the domestic scene, the MPC underscored the need to hasten the reform in the banking sector to ensure the flow of credit to the real sector, which in turn would support growth in the medium term.

It underlined the need to energise reform in critical sectors such as power, in order to attract private sector/foreign investment and thereby promote employment-generating growth.

Provisional data from the National Bureau of Statistics (NBS) show that real Gross Domestic Product (GDP) will grow by 6.68 per cent in the first quarter of 2010, down from 8.23 per cent in the fourth quarter of 2009, but up from the 4.50 per cent in the first quarter of 2009.

Overall GDP growth for 2010 is projected at 7.53 per cent, higher than the 6.90 per cent recorded last year.

The non-oil sector, especially agriculture, wholesale and retail trade, as well as services would remain the major driver of growth, likely to be complemented by a modest increase in the growth of oil sector GDP, if peace is sustained in the Niger Delta.

The MPC observed that the optimistic growth projections are predicated on the assumption that the reforms initiated in certain key sectors would be carried through.

It, therefore, urged strong government commitment and political will to implement the reforms.

Regions : Africa

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