Cutting Interest Rate Now Will Fuel Recession – Emefiele

By Nse Anthony-Uko
(Sundiata Finance) – Despite the several calls from the real sector for a cut in the benchmark interest rate, the governor of the Central Bank of Nigeria, Godwin Emefiele has reiterated the decision of the apex bank to hold rates saying a cut in rates would cause the economy to sink further into recession.

Speaking at 2017 Annual General Conference of the Nigerian Bar Association in lags yesterday, Emefiele stated that cutting the Monetary Policy Rate which is currently at 14 per cent would swell the volume of money supply in the economy and cause a spike in inflation rate.
The apex bank had kept benchmark interstitial rate at a high of 14 per cent since last year. Emefiele explained that with the crash in global oil price, Nigeria at some point was a simultaneous case of falling GDP Growth, rising Inflation, persistently High Interest Rates, falling foreign exchange Reserves and a depreciating Exchange Rate.
He noted that “in view of the dilemma of tackling these problems simultaneously, the optimal solution would be to prioritise and address them sequentially. Given our core mandate, and the pervasive effect of high inflation and exchange rate volatility, we chose to tackle these two head-on.
“It is important to highlight that high inflation is a significant inhibitor of economic growth. High inflation is not only harmful to growth in the long run, it discourages saving and inhibits planning and investment as people become more sceptical on the direction of prices of goods and services.
“As a result, achieving low inflation is a major priority to us at the Central Bank of Nigeria. If we had chosen to reduce interest rates and increase money supply under those circumstances, we would have further deepened the recession, while assuring foreign investment outflows which would worsen foreign exchange reserves accretion.”
He noted further that if the apex bank should abandon its pursuit of low inflation and decide to implement expansionary Monetary Policy in order to engender rapid economic growth, the outcome for inflation would be much worse.
“This is because expansionary monetary policy would require reducing the CRR and Liquidity Ratios and increasing money supply through purchase of Bonds and Treasury Bills. Obviously, with much more money in circulation, inflation would be worse.”

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