. As experts worry over economic implications
By Clara Nwachukwu
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), yesterday raised its benchmark interest rate to 18% to further rein in inflationary pressure.
The CBN Governor, Godwin Emefiele, announced this in a communiqué he read after the two-day MPC meeting which began Monday.
The MPC in January jerked the Monetary Policy Rate (MPR), also known as the benchmark interest rate to 17.5%, as the baseline interest rate in the economy.
Addressing journalists at the CBN headquarters in Abuja, Emefiele insisted that the tightening measures adopted by the Committee will help to address inflationary pressure.
This is despite that Nigeria’s headline inflation rate rose even higher to 21.91% in February against 21.82% recorded in January, according to the National Bureau of Statistics (NBS), due to the scarcity of the redesigned Naira notes.
Emefiele said: “We believe that as we continue this process that inflation will eventually begin to trend downwards.
“Whether we like it or not, between now and May, or the end of this administration, we will expect that subsidy will disappear. Subsidy removal has its own implication on prices which is inflation.
“We are not optimistic that prices will continue to come down because of these measures but we feel we need to continue to tighten.”
In doing this, he said the important thing is for the Committee to watch the margin between the policy rate and inflation, which he said has remained negatively wide.
“To reduce the gap in negative real rates we will continue to tighten but more moderately,” he said, adding that “in economics, when you find negative real rate, it is a disincentive to even investment.”
As a result, he said the MPC is doing everything to rein in inflation, even as it is conscious of the fact that when the rate is over-tightened, it could have a negative impact on the banking sector, the financial ecosystem, and the stability of the economy.
Aside from raising the interest rate, Emefiele said the Committee also voted to keep the Asymmetric Corridor at +100 and -500 basis points around the MPR; retain the Cash Reserve Ratio (CRR) at 32.5%, and the Liquidity Ratio at 30%.
The CRR is the share of a bank’s total customer deposit that must be kept with the Central Bank, while the bank’s liquidity ratio is the proportion of deposits and other assets they must maintain to be able to meet short-term obligations.
We believe that as we continue this process that inflation will eventually begin to trend downwards… To reduce the gap in negative real rates we will continue to tighten but more moderately.
Experts react to rates hike
A Professor of Capital Market at the Nasarawa State University, Keffi, Uche Uwaleke, noted that the Committee must have arrived at the decision based on the rising inflation and pressure from the foreign exchange (FX) market.
Uwaleke, in a statement, said: “It is apparent the MPC is still concerned about rising inflation and the pressure in the forex market against the backdrop of its primary mandate of maintaining price stability.
“However, I had expected MPC to maintain a hold position considering the significant drop in currency in circulation occasioned by the currency redesign policy and the fact inflation rate actually decelerated month on month between January and February 2023.
“The adverse impact of the recent cash scarcity on productive activities as well as the conclusion of election season should have provided justification for a hold position.
“That said, I think that the increase in the MPR by 50 basis points is a signal to financial markets that the CBN has begun the process of rate-hike pause and I expect that a complete halt in policy tightening will most likely happen at the next scheduled meeting of MPC in May.
“This is necessary in order to stimulate economic activities and create job opportunities.”
However, the Director of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, warned that investors will bear the brunt of the rate increase.
In a statement, Yusuf, a former Director-General, the Lagos State Chamber of Commerce and Industry (LCCI), said the interest rate increment means an additional burden to investors in Nigeria.
He said: “The victims of the continuous hike in the monetary policy rate are the investors in the real economy and other entrepreneurs in the economy. An increase of the MPR to 18% means an additional burden on business as it will result in a spike in the cost of credit. Production costs would increase, sales would drop, profit margins would shrink, and investors’ confidence would be negatively impacted.
“The reality is that financing, high energy cost, and foreign exchange challenges are much bigger factors in the inflation equation.
“The CBN should pay greater attention to financial system stability at this time. Recent developments in the global financial system underscore the imperative of cautious interest rate hikes.”
Apart from the MPR, Yusuf also expressed concern over the stifling effect of the high CRR of 32.5% on the banking system stability and financial intermediation role of the banking system.
“It is regrettable that the CBN Governor did not acknowledge the pains and sufferings that ordinary citizens have been going through because of the cash crisis. The CBN Governor should have shown some empathy and apologise to Nigerians for the trauma inflicted by the cash crisis,” he said.
Also, Senior Lecturer at the Department of Economics, University of Lagos, Tunde Adeoye, in an interview with the News Agency of Nigeria (Nan) in Ogun State, said the MPC had already tightened the MPR beyond measures through its naira redesign and cash swap policy.
Adeoye said this development has already mopped up enough money in circulation and led to a situation where people could not easily have access to their money.
This is the sixth time the CBN increased the interest rate against the advice of manufacturers and some key stakeholders.
“One of the implications of continuous tightening of the MPR, otherwise known as benchmark interest rate, is that people would not have money for investment.
“In addition, more people are likely to lose their jobs, fall in people’s income and result in economic depression,” Adeoye said.
He argued that the MPC could have embarked on an ‘ease policy’ than further tightened the economy which was already hitting up.
Similarly, a former President, Association of National Accountants of Nigeria (ANAN), Samuel Nzekwe, said increasing the MPR would make the cost of borrowing higher and limit the number of people coming to the banks for loans.
“The MPC should have waited for the economy to stabilise before thinking of increasing the MPR in their next meeting,” he said, noting that people have not been doing many business transactions since January due to the lack of cash in circulation. (Additional report from NAN)
