Central Bank of Nigeria has cut its benchmark lending rate by 100 basis points to 11.5 percent for the second time this year from 12.5 percent announced in May.
CBN governor Godwin Emefiele in a statement said that the cut was supported by 6 out of the 10 members of the monetary policy committee (MPC). The move gears towards stimulating growth and containing rising inflation that stands at 13.2 percent occasioned by rising food prices.
Emefiele reiterated the regulators commitment to maintain inflation within the target range of 6% to 9%.
In addition, a drop in oil production and prices led to a shortage of dollars threatening to weaken the Naira as oil accounts for 90 percent of Nigeria’s foreign exchange earnings. The government ban on access to foreign currency for food and fertilizer imports has seen business turn to the parallel market for dollars further destabilizing the Naira. On Tuesday, the Naira exchanged at N467 per dollar compared to the central bank’s exchange rate of N381 per dollar.
Lockdown across major cities due to COVID19 pandemic have resulted in weak aggregate demand, rising unemployment, and disruptions in supply chains.
The MPC noted the continued weakness in economic activities as indicated by the Manufacturing and non-Manufacturing Purchasing Manager’s Indices (PMI), which remained below the 50-index point benchmark. In August 2020, the Manufacturing and non-Manufacturing PMIs were 48.5 and 44.3 index points, respectively, compared with 42.4 and 43.3 index points in July 2020.
However, analysts feel that the rate cut is insufficient to boost growth in Africa’s largest economy. In the second quarter of this year, the Nigerian economy contracted by 6.1 percent. A further contraction in the third quarter raises concerns about a looming recession. The government projects that the economy may contract by as much as 8.9 percent in 2020.