By Clara Nwachukwu
To narrow the negative real interest rate gap and rein-in inflation, the Central Bank of Nigeria (CBN), yesterday, increased the monetary policy rate (MPR) yet again to 15.5%.
This is the third hike in a row by the CBN, and runs contrary to the World Bank’s warning a fortnight ago against central banks’ continued hike in interest rates in response to inflation, saying it may be edging the world toward a global recession in 2023.
But defending the latest hike in a communiqué issued at the end of the Monetary Policy Committee (MPC) meeting in Abuja, the CBN Governor Godwin Emefiele, said members also felt that “an aggressive rate hike would slow capital outflows and likely attract capital inflows and appreciate the naira.”
Emefiele, who read out the resolutions of the MPC, said members “noted that a tight policy stance would help consolidate the impact of the last two policy rate hikes, which is already reflecting in the slowing growth rate of money supply in the economy.”
Indeed the World Bank in its latest study, also warned that “a string of financial crises in emerging markets and developing economies would do them lasting harm.”
On the contrary, the Washington-based lender further noted the “expected trajectory of interest-rate increases and other policy actions may not be sufficient to bring global inflation back down to levels seen before the pandemic.”
Rather than simultaneous interest hike, World Bank Group President, David Malpass, urged policymakers to “shift their focus from reducing consumption to boosting production, to achieve low inflation rates, currency stability and faster growth.”
He added that “Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction.”
Aside from raising the rate the CBN is willing to lend to commercial banks, the MPC also increased the cash reserve ratio (CRR) to a minimum of 32.5%.
The Committee however retained the asymmetric corridor of +100/-700 basis points around the MPR as well as the Liquidity Ratio at 30%.
…an aggressive rate hike would slow capital outflows and likely attract capital inflows and appreciate the naira.
Members’ considerations
Explaining the rationale behind the members’ decision on the rates, Emefiele said: “The MPC was concerned that within a four-month period, inflation had accelerated aggressively by 280 basis points from 17.71% per cent in May 2022 to 20.52 per cent in August 2022.
“The Committee was thus of the view that given the primacy of its price and monetary stability mandate, it was expedient that significant focus must be given to taming inflation.”
Against this backdrop, he said: “The Committee was therefore of the view that a hold or loosen option was not in consideration at this meeting.
“This is also because a loosening will further widen the negative real interest rate gap and worsen the financial market conditions, as savings mobilization and investment inflows would decline further.
“It was also of the view that with the aggressive policy normalization in advanced economies, loosening the stance of policy would result in a sharp depreciation of exchange rate, leading to further hike in capital outflows.
“As regards a hold decision, this would mean a continuous deterioration in real earnings of fixed income earners and the livelihood of middle- and low-income households.”
He continued: “Members deliberated on the impact of the widening margin between the current policy rate of 14 per cent and the inflation rate of 20.52 per cent. At this Meeting, the option to loosen the policy rate was not considered as this would be gravely detrimental to reining-in inflation.”
The Committee was thus of the view that given the primacy of its price and monetary stability mandate, it was expedient that significant focus must be given to taming inflation.
Implication of rates increase
This latest hike brings the total rate increase so far in 2022 to 400bps, representing the largest annual increase since 2011.
While many analysts predicted the hike in MPR, others like Cordros Capital, were surprised by the increase in the CRR, a percentage of a bank’s total deposit maintained with the CBN at all times to 32.5%, up from 27.5%.
In fact, all banks are expected to back up their CRR with cash by tomorrow, or risk losing out from the foreign exchange market.
Emefiele said: “We expect that all the banks in Nigeria must fund their accounts by Thursday – 48 hours, because we will debit them for CRR.
“We will take their CRR to a minimum of 32.5 which means we are going to take liquidity out of their vaults by Thursday,” and if any bank fails to beat the deadline, the apex bank may “preclude those banks from foreign exchange market until they meet this 32.5%”.
He insisted that “This message is meant to underscore the fact that this very aggressive decision to rein in inflation must yield results. We do not want to face Nigerians in the next few months, and we begin to take the blame for not being able to rein in inflation and in spite of all of the rates that we raised.”
Despite the surprises, Cordros Capital believes “the decision of the MPC was supported by the Q2-22 GDP number, which provided a cautious comfort on growth levels and provided the needed impetus for the Committee to maintain its fight against the stubbornly-high inflationary pressures.
“More so, a sustained negative real interest rate could dampen domestic investments and undermine the stability of the local currency.”
