In spite of the optimism expressed by the Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele about the possibility of reduction in the Monetary Policy Rate (MPR) before July, Chief Executive of Afrinvest Securities Limited, Ayodeji Ebo says a rate cut will be unlikely as this would undermine foreign exchange inflow and stability in the foreign exchange market.
He made this assertion while speaking at the Finance Correspondents Association of Nigeria (FICAN) Economic Outlook with theme: ‘Nigeria Economy and Financial Market Outlook: 2017 Review and 2018 Outlook’ held at the FICAN Centre, Lagos.
The CBN Governor had on Wednesday said the apex bank may begin a gradual rate cut by the end of the first half of the year as inflation continues to decline. Inflation which had risen to almost 19 per cent last year January had maintained a steady decline standing at 15.37 in December.
Ebo stated that a cut in rate would impact rates at the money market causing investors to consider putting their funds in other countries where the risks are not as high with a good enough returns in investment.
“This will affect the current stability at the foreign exchange market and that is what the government would not want at a time the country is approaching an election period”, he said.
He explained further that while the argument for a cut in rates is for increased lending to the real sector, a lower benchmark interest rate would not result in increased lending by banks.
“Bringing down the MPR will not translate to improve lending by the banks. There is nothing like patriotic lending because we have to grow the economy. The banks will not use private money to grow the economy when they still see there are evident risks within the space.
“Most of the companies that they would have lend to are struggling in terms of returns on their investment as they have factor in the cost of power as well as infrastructure and by the time you factor in those things your business is not profitable and you cannot service your loan so the bank will not lend to you.
“For instance a lot of banks lent to the power sector during the privatisation but a lot of them got their hands burnt, so no matter how low interest rate comes, that will not translate proportionately to increase lending as long as they continue to see that risks.”