Financial experts in Nigeria have predicted that the reduction of the Monetary Policy Rate (MPR) to 12.5 percent from 13.5 percent would likely drive more funds into the capital market.
The experts, who commended the Central Bank of Nigeria (CBN) for the MPR reduction, said it would boost activity in the capital market due to low yield in the money market.
They told Journalists in Lagos that the reduction was a welcome development, but not enough to encourage credit expansion.
A Professor of Economics at the Olabisi Onabanjo University, Ago-Iwoye, Ogun State, Sheriffdeen Tella, said the MPC’s decision would likely lead to redirection of funds into the capital market.
He, however, said it was not low enough to encourage credit expansion which would increase investment and consequently output.
“The current rising inflation rate is not caused by excess money, but shortage of goods due to fall in production.
“So, lower MPR will signal to banks to lower interest rates generally and thereby encourage borrowers.
“Interest rates on intervention funds have been reduced to five per cent, but that fund is not available to all businesses or borrowers.
“For this period of COVID-19, lending interest rates above 10 per cent is too high.
“When interest rates are low, borrowing increases as well as outputs and inflation will fall, more so when food index is the major driver of inflation,”Tella explained.
Speaking on shortage of foreign currency in the economy, he attributed the development to speculative activities.
“The current demand for foreign exchange is more from speculative angle as real production is yet to take off.
“To prevent further naira depreciation when demand for imports increases, the CBN will have to intervene more,” he said.
Mr Ambrose Omordion, the Chief Operating Officer, InvestData Limited, said the outcome of MPC meeting showed CBN’s readiness to reduce the negative impact of COVID-19 on the economy.
Omordion said the interest rate cut would further push down yield in the money market, thereby making more funds available for the private sector.
According to him, appetite for loan will likely increase with the reduced interest rate.
He noted that the low yield in the money market instrument might drive some funds to the capital market.
Omordion said that investors would increase their investment in the equities market to hedge against inflation.
The Monetary Policy Committee had voted to reduce the MPR by 100 basis points to 12.50 percent from 13.5 percent.
This was in a bid to salvage Nigeria’s economy from the negative impact of COVID-19 pandemic.