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Experts worry over hike in CBN interest rate to 22.75% 

By Clara Nwachukwu

The astronomical increase by 400% basis points of interest rate to 22.75% by the Central Bank of Nigeria (CBN’s) Monetary Policy Committee (MPC), may compound current economic woes, experts fear.

The MPC, yesterday, raised the Monetary Policy Rate (MPR) to 22.75% from 18.75%, in its first meeting to be chaired by the CBN Governor Yemi Cardoso, since his appointment on September 15, 2023, by President Bola Tinubu.

While the hike was anticipated as part of measures to rein-in galloping inflation and attendant economic hardship, the quantum leap in the MPR, the rate at which the CBN lends to commercial banks, experts argue will portend negative impact on the economy.

Mr Cordoso, in a communique read at the end of the MPC meeting, which was held at the CBN headquarters in Abuja, explained that the hike in rates “were centered on the current inflationary and exchange rate pressures, projected inflation, and rising inflation expectations.”

He noted that “Members were concerned about the persistent rise in the level of inflation and emphasized the Committee’s commitment to reverse the trend as the balance of risk leaned towards rising inflation.”

He, however, added that the Committee, “acknowledged the trade-off between the pursuit of output growth and taming inflation but was convinced that an enduring output expansion is possible only in an environment of low and stable inflation.”

Against this backdrop, the CBN Governor said the 12-member Committee decided to further tighten monetary policy as follows:

  • Raise the MPR by 400 basis points to 22.75 from 18.75 per cent.
  • Adjust the asymmetric corridor around the MPR to +100/-700 from +100/-300 basis points.
  • Raise the Cash Reserve Ratio from 32.5 per cent to 45.0 per cent.
  • Retain the Liquidity Ratio at 30 per cent.

Economic concerns

But reacting to the rates increases, the Centre for the Promotion of Private Enterprise (CPPE), insisted that the MPC’s decisions “would hurt the real sector of the economy, which is already contending with numerous macroeconomic challenges.”

According to the CPPE, “The increase of Monetary Policy Rate (MPR) from 18.75% to 22.5%; and cash Reserve Ratio [CRR] from 32.5% to 45% pose a major risk to the financial intermediation role of banks in the Nigerian economy. 

“The increase would constrain the capacity of banks to support economic growth and investment, especially in the real sector of the economy because the increases are quite significant.”

While noting that the tightening of policies is not peculiar to Nigeria alone but a policy response of Central Banks globally, CPPE argued that in the case of Nigeria, the MPC decisions “failed to reckon with domestic peculiarities.”

It maintained that “The key drivers of Nigeria inflation are largely supply-side variables, and the CBN ways and means financing. 

“Over the last two years, there has been persistent monetary policy tightening, yet there has not been any significant impact on the inflationary pressures. If anything, the general price level has been continuously on the increase.”

It continued: “We recognise that the primary mandate of the CBN is price stability, but numerous headwinds had posed significant risks to this critical objective.

“Some of these include the surge in commodity prices and impact on energy cost, disruptive effects of insecurity on agricultural output, and global supply chain disruptions.

“The surge in ways and means finance also makes the CBN a culprit in the inflation predicament over the past few years.  

“The hike in MPR or CRR would not change these variables. Already, bank lending has been constrained by the high CRR which was until the latest review, 32.5% [many operators in the sector claim that effective CRR is as high as 50% for many banks], the discretionary debits by the apex bank. 

“The credit situation in the economy is already very tight, with lending rate ranging between 25 -30%.”

The transmission effects of monetary policy on the Nigerian economy are still very weak. In the Nigerian context, price levels are not interest sensitive. 

For Cordros Capital, while the MPR rate increase was expected, but the level of hike by a whopping 400bps was very surprising.

“We attribute the aggressive rate hike to the need to manage inflation expectations, which have been primarily stoked by the constant depreciation of the naira and the low credibility of the institution in maintaining price stability.” Also, the firm said it had expected that the CBN would hold other parameters constant, “however, in line with the CBN’s goal to extensively mop up excess liquidity, the committee raised the CRR to 45.00%, 125bps higher than the previous rate of 32.50%, widened the asymmetric corridor to +100bps/-700bps (previously: +100bps/-300bps), whilst retaining the liquidity ratio at 30.00%.”

Despite the MPC’s efforts to tame inflationary trends, Cordros Capital projects that domestic prices will remain high “due to the depreciation of the naira exchange rate, elevated cost of energy products and reduced food supply induced by heightened insecurity in the food-producing middle-belt region.”

It added that “Overall, the MPC’s hawkish stance is expected to further heighten risk-off sentiments in the local market, as domestic investors, who make up the majority of market participants (c.92.0% as of January 2024), may opt for safer assets amid rising fixed income yields.

“Consequently, we anticipate a prolonged bearish market trend driven by yield movements and the uninspiring corporate earnings reported thus far.”

Emphasizing the impact of the rates hike, other experts argued that “The transmission effects of monetary policy on the Nigerian economy are still very weak. In the Nigerian context, price levels are not interest sensitive. 

“Supply side issues are much more profound drivers of inflation. The new dramatic increase in MPR to 22.5% hike means that the cost of credit to the few private sector that have exposure to bank credits will increase which will impact their operating costs, prices of their products and profit margins, amidst very challenging operating conditions. 

“The equities market may also be adversely impacted by the hike.”

They, therefore, advised that “It is thus imperative for the CBN to accelerate the process of increased capitalisation of the development finance institutions to create a concessionary financing window for the real sector and the small businesses.”

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