Abuja — The Central Bank of Nigeria (CBN) yesterday cut its key interest rate - the Monetary Policy Rate (MPR) - by 1.75 percentage points to boost bank lending and ease the economic slowdown.

The benchmark lending rate, which was lowered from 9.75 per cent to 8 per cent, was the first reduction in seven months.

The banking watchdog also announced a downward review of both the Cash Reserve Ratio (CRR) and Minimum Liquidity Ratio (MLR) of banks from 2 to 1 per cent and 30 to 25 per cent respectively - effective from Tuesday, April 14, 2009.

Briefing newsmen in Abuja on the outcome of the meeting of the Monetary Policy Committee (MPC), CBN Governor, Prof. Chukwuma Soludo, also disclosed that the nation's foreign reserves had dropped to about $47 billion from $51.07 billion on January 23, 2009.

Essentially, the MPC's policy decision, which complemented the recent efforts of the apex bank on interest rates, is expected to enable the banks to lend out to their customers at reduced interest rates and make more funds available, especially to the productive sector of the economy.

Just recently, the apex bank limited the maximum lending rate charged by commercial banks to 22 per cent and the deposit rate to 15 per cent as of April 1 to ease industry financing costs and boost growth.

The CBN governor also announced sanctions for banks that breach the new interest rate regime.

He said the first offender (bank) will pay N50 million, second offender - N50 million plus suspension from the Retail Dutch Auction System (RDAS), while the third offender would pay a fine of N50 million, be suspended from RDAS and have its Chief Executive Officer suspended.

The last time the banking watchdog slashed its benchmark interest rate was on September 18 last year at an emergency meeting that was called in response to the global credit crises.

The measures adopted by the CBN then, include a reduction in the Bank's MPR by 50 basis point from 10.25 per cent to 9.75 per cent; a reduction in the MLR from 40 per cent to 30 per cent; and the Cash Reserve Ratio (CRR) from 4 per cent to 2 per cent. All these had resulted in the injection of N1.05 trillion into the Nigerian economy.

In addition to reducing rates and liquidity requirements, the CBN had also allowed banks to buy back their securities and extended the lending window to 365 days (1 year), as opposed to overnight lending which obtained in the past. The decision by the CBN to increase liquidity was in synch with several Central Banks around the world, which moved rapidly to restore confidence in the markets.

The CRR is the proportion of banks total deposits held in cash balance with the CBN, while MLR is the proportional ratio of specified liquid account (cash, treasury bills, current account balances with the CBN and bonds) as total deposit liability.

"If you have tight liquidity in the system, you have a condition that requires easing of monetary policy," Soludo said. Commercial lending rates should moderate "in the near- term" in response to the bank's efforts to improve liquidity, he added.

Inter-bank lending rates have risen after a slump in the stock exchange led many investors to default on loans. At least 1 trillion naira ($6.8 billion) was said to have been leant to speculators to buy shares as equities soared almost 13-fold since 2000. Nigeria's All Share Index tumbled 46 per cent last year and 37 per cent in 2009.

Soludo explained that the cut the MPR was based upon the realisation by its MPC that the domestic money market rates have been under pressure since February 2009.

He noted: "The weighted average inter-bank call rate went up from 17.62 per cent in February to 22.15 per cent in March. The collateralised open buy back (OBB) however, was lower than the monetary policy rate (MPR). The deposit and lending rate too have inched up."

The foregoing notwithstanding, he said the staff expected "in the near-term, interest rates are likely to moderate in response to expected subdued inflation and improvements in the liquidity conditions facilitated by the CBN initiatives in this regard."

Specifically, he said the committee had identified the major pressure policy in the short term to include: "Liquidity tightness and hence relatively higher interbank interest rates and also pressures on other interest rates; lower growth rate of credit to the private sector compared to the tend in the last three years; rising food price inflation and need for increased agricultural output; and ensuring the continuation of banking and financial sector stability and soundness."

Soludo noted that inflation in the economy has been high and as such has become worrisome. The MPC, he pointed out, had noted "the upward swing of the year-on-year headline inflation from14 per cent in January to 14.6 per cent in February."

Lamenting that the outlook for inflation in the near term remains uncertain, he however, said: "The staff estimates indicates that inflation cold decelerate to single-digit by mid-2009, in response to subdued aggregate demand, lower impact of imported inflation and the near-completion of the pass through effect of the depreciation of the naira."

Soludo said provisional data indicated that broad money (M2) declined by 1.14 per cent in February 2009 over the end-December 2008 level.

"However on year-on-year basis (February 2009 over February 2009, the order of expansion in M2 on a year-on-year basis is in line with long-term trends and could be sustained in the short to medium term," he noted.

Nevertheless, the CBN governor said the MPC noted: "Financial conditions in the country remain robust. There are no apparent systemic threats to the banking system. Regulatory practices and guidelines are generally in line with best practice.

"The committee further noted with satisfaction the efforts being made to continuously improve upon the regulatory framework. Foreign exchange reserve position has continued to support external sustainability, facilitated by the downward movement in the overall world trade and financial flows."

On the exchange rate, Soludo said the MPC was satisfied with the positive outcomes of measures taken recently in stabilising the exchange rate in all segments of the market.

He said: "The demand for foreign exchange has moderated significantly in the retail Dutch auction system and will continue to be sustained in the near term."

But the Chief executive officer of Economics Associates, Ayo Teriba, who described the measure by the CBN as reactionary, said the effect would not be felt because Treasury Bills rate that is driven by demand and supply and ultimately affects everybody has already falling.

He said the MPR rate, which has just been reduced affects only the 23 banks, whereas the Treasury Bills rate has a salutary effect on the generality of the public since it is the rate at which government borrow.

"We should not expect much impact because the MPR rate should normally lead the market but it is now following the market where rate of Treasury Bills have already dropped," he remarked.