In a surprise move, the MPC voted 7:3 to cut the benchmark interest rate by 100bps to 12.5%pa. This is the first rate cut since March 2019.
The Committee’s major consideration was the need to strike a balance between price and exchange rate stability and stimulate economic growth. The decision to adopt an accommodative monetary policy stance in light of rising inflation (12.34%) and negative real rates of return for investors (-9.89%) was found to be inappropriate at this time.
If history is anything to go by, the rate cut will have a limited impact on markets and is unlikely to influence the expectations of key stakeholders. The economy is expected to contract sharply and fall into a recession in Q2 and Q3 whilst inflation will still remain potent.
The good news is that the economy is expected to recover in Q1’2021 if policy makers demonstrate economic discipline and make tough decisions.
In the publication, the FDC Think-Tank analyzes the implications of the MPC’s decision on the economy.
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