The MPC confounded analysts by moving towards a more dovish stance in spite of a jump in inflation to a 29-month high (13.22%). The benchmark interest rate was lowered by 100bps to 11.5%p.a. The asymmetric corridor between borrowing and placing funds with the CBN has been expanded to +100/-700bps from +200/-500bps. This means that access to the CBN discount window by the Deposit Money Banks (DMBs) is now cheaper.
The CBN appears to be following in the footsteps of other Central banks. However, most of those economies are in low inflation environments. The negative real rate of return i.e. the difference between the rate of inflation and 90-day T/bill rates is likely to reduce the marginal propensity to save (MPS) and fuel further inflationary pressures.
Another questionable assumption is the belief that a reduction in interest rates will automatically and immediately translate into output growth and lower inflation. In reality, the time lag between policy-making and transmission impact is likely to be much longer than anticipated.
In the download and link below, The FDC Think Tank shares its view on the likely impact of the MPC decision on businesses and the economy in general.
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