The variables, as US FED cut rate for the second time in a row as CBN retains MPR, CRR and other rates

THE FEDER AL OPEN MAR KET COMMIT TEE (FOMC) of the U.S. Federal Reserve on Wednesday (September 18, 2019), met, the aftermath of which, was the reduction of its benchmark overnight lending rate to a target range of 1.75% to 2% from its previous range of 2% to 2.25%.

The federal funds rate is a monetary policy tool used to achieve the Fed’s goals of price stability (low inflation) and sustainable economic growth. Changing the federal funds rate influences the money supply, beginning with banks and eventually trickling down to consumers. The Fed lowers interest rates in order to stimulate economic growth, as lower financing costs can encourage borrowing and investing, and in cases where there are excessive growth and subsequent inflation, the Fed can then raise interest rates in order to slow inflation and return growth to more sustainable levels.

The FOMC cites “the implications of global developments for the economic outlook, as well as muted inflation pressures” as the primary rationale for the cut. This decision marks the second successive rates cut in the U.S. in the last three months; a repeat of what was last seen during the global financial crisis of 2007/2008. Hence, one can infer that the decision was born of the sensitivity of the decision makers to the possibility of a similar crisis, as recession fears rose during the summer, amid the U.S. – China trade tensions and weakening data particularly in the manufacturing sector.

Although the decision to cut the Fed rates was made by a United States Institution, the effects however are global. With the reduction of the Fed rates, a ripple effect that affects most businesses globally (Exporters, Importers, and Others) - is the currency. Lowered Fed rates tend to reduce exchange rate pressure in many emerging markets with attractive yields (such as Nigeria), as foreign investors are known to pick more interest in their asset classes at a time like this. Hence, we expect to see foreign investors renew interest on investment assets in emerging markets in the weeks to come.

At the end of the rescheduled Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN) on Thursday and Friday 19th and 20th of October 2019, the MPC unanimously decided to retain key monetary policy variables – Monetary Policy Rate (MPR) at 13.5%, Cash Reserve Ratio (CRR) at 22.5%, Liquidity Ratio (LR) at 30%, and the Asymmetric Corridor at the range of +200/-500 basis point around the MPR.

Although, the MPC acknowledged that there has been positive moderation in the inflation rate but still above the target range of 6% to 9%, it however pointed out that a rate cut would heighten inflation tendencies, drive growth in the consumer credit with corresponding adjustment in the real sector. Also, increase in rate would result in exchange rate pressure as money supply rises.

The Committee was of the opinion that retaining the current position of policy offers pathways to appraising the effects of the suit of doubtful monetary policy to encourage credit delivery to the real sector, especially in the light of the subsisting implementation of the 60%Loan-toDeposit Ratio policy.