For the first time in six years, Central Bank of Nigeria has reduced the benchmark for its interest rate, cutting it from a record high of 13% to 11%, differing from other countries in Africa that have tightened their monetary policies because of their weak currencies. No one, not even the 20 economists surveyed by Bloomberg predicted this large cut.
Godwin Emefiele, Chairman Central Bank explained after the decision, “What we’ve decided to do at this meeting is that we must stimulate growth. We don’t have a choice.”
The Central Bank is using unconventional economic policies to protect Nigeria’s currency and boost the country’s economic growth. One of the policies is foreign exchange restrictions which helps to keep the naira stable despite the country’s plunge in oil revenue. Other policies implemented include the reduction of the cash reserve ratio for commercial banks from 25% to 20% as a means to boost liquidity. This will allow banks increase lending to companies and industries which will in turn create jobs.
Razia Khan, Standard Chartered’s Chief Africa economist, explained this Central Bank’s move, “The CBN is using a blanket tool like the CRR which results in a blanket liquidity release into the economy to somehow try to boost employment in specific real sector economies.”
With this move, lower interest rates may also help the government to finance its budget as lastweek President Muhammadu Buhari asked lawmakers to approve a supplementary budget for this year that will raise spending by 10% and increase borrowing by an additional 1.6 trillion naira ($8 billion)
Central Banks of countries in Africa in response have raised their interest rates this year to ward off inflation threats coming from weaker currencies but the naira has remained fixed at 198 to 199 per dollar since Godwin Emefiele imposed the foreign exchange restrictions in February.
Emefiele explained, “The committee will continue to monitor developments around the naira exchange rate, interest rate and consumer prices even as targeted measures are needed to channel liquidity to the relevant and key sectors in the economy.
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This article was first published on 25th November 2015 and updated on November 27th, 2015 at 8:40 am