By Stanley Onyeka, Lagos and Tochukwu Bliss, Abuja
The Nigerian stock market yesterday recorded a loss of N209 billion in market capitalization, as investors reacted negatively to the Central Bank of Nigeria’s (CBN) recent interest rate hike.
The Monetary Policy Committee (MPC) of the CBN at the end of its 298th meeting on Tuesday raised the Monetary Policy Rate (MPR) by 25 basis points to 27.50% in November, up from 27.25% in September, while retaining all other parameters.
The CBN Governor, Olayemi Cardoso, who made the announcement in a communique read on behalf of members at the end of the meeting in Abuja, hoped
the hike would help to tackle rising inflation, which stood at 33.87% in October.
Unfortunately, despite increasing the rate for the 6th consecutive, there appears to be no abating the galloping inflation.
The immediate effect of the rate increase, saw the Nigerian Exchange Ltd. (NGX) market capitalisation falling from N59.178 trillion to N58.969 trillion, a 0.35% decline.
Similarly, the All-Share Index fell by 330 points to close at 97,296.57, down from 97,626.27 on Tuesday, reducing the Year-to-Date return to 30.12%.
Potential impact
Analysts at Cowry Asset Management Ltd. had predicted mixed market directions ahead of the MPC’s decision, noting its potential impact on interest rate expectations and investment strategies.
They also highlighted opportunities for strategic positioning in fundamentally strong stocks as November trading wraps up and fund managers prepare for December’s window-dressing activities.
Reacting to the interest hike, Associate Professor of Finance and the current Head of Banking & Finance Department at Nasarawa State University, Keffi, Uche Uwaleke, said this was “a signal that the CBN will completely pause or apply the brake beginning from the first quarter of next year.”
Noting that the increase was anticipated by many analysts, Mr Uwaleke in a reaction sent to Sustainable Economy Nigeria, argued that: “This has to happen to stem the rising cost of funds and negative impact on credit access so that small businesses in particular can breathe.”
He, however admitted that “Regrettably, headline inflation has remained elevated and even resumed northwards despite the aggressive tightening measures by the CBN.
“The only area where one can see the benefits of the interest rate hikes has been in the FX market where the impact of foreign portfolio inflows has helped to stabilize the exchange rate in the official window.”
He added that “Indeed, the current macroeconomic challenges make it imperative for a proper synergy between monetary and fiscal policies.”
The economy needs oxygen and stimulus, not policy measures that would worsen an already suffocating situation.
Hike, not investment-friendly
But for the Centre for the Promotion of Private Enterprise (CPPE), the CBN decision is detrimental to investment and economic growth, especially at a time when businesses are still struggling.
The Chief Executive Officer, CPPE, Muda Yusuf, in a statement released on Tuesday, expressed concern over the impact of the rate hike.
Taking a swipe at the CBN, he said: “We believe that the policy decisions of the CBN are most inappropriate for the prevailing economic conditions and the challenges faced by entrepreneurs in the country.
“The operating and production costs of businesses would be further exacerbated by the latest monetary policy tightening.”
According to him, “The economy needs oxygen and stimulus, not policy measures that would worsen an already suffocating situation.”
Dr. Yusuf argued that the monetary conditions are extremely difficult for businesses to bear, given the prevailing macroeconomic challenges.
He continued: “It is quite troubling that at a time when manufacturers, entrepreneurs, and other investors in the economy are craving for a breath of fresh air, the CBN chose to tighten the noose on them by resorting to a further tightening of monetary policy.
“The private sector should not be made to pay the price of liquidity growth which they were not responsible for. Issues of excess liquidity should be addressed within a causative context.
“The injection of liquidity into the system is largely public sector-driven, as rightly noted by the CBN governor. Therefore, the focus of resolving it should be within that context.”
Besides, Mr. Yusuf warned that the earlier increase in the Cash Reserve Ratio (CRR) of Deposit Money Banks to 50% portends negative consequences for the banking system, as this would further exacerbate the cost of funds for investors, potentially pushing it above 35%.
He added that this, combined with the increase in MPR, would make it even more challenging for businesses to access funding.
Members thus, reiterated the need to strongly forge ahead with the deepening collaboration between the monetary and fiscal authorities to ensure the achievement of our synchronized objectives of price stability and sustainable growth.
Economic considerations
Mr Cardoso, while announcing the rate increase, explained that “This meeting was held on the backdrop of renewed inflationary pressures, as the headline, food and core measures rose year-on-year in October 2024.
“The Committee was particularly concerned that all three measures also inched up on a month-on-month basis, suggesting the persistence of price pressures, with attendant adverse impacts on income and welfare of citizens.
“Members, therefore, agreed unanimously to remain focused in addressing price developments.”
He continued: “While food prices remain a key contributor to the uptick, Members commended the efforts of the Federal Government for the improved security, especially in the North-East of the country, which would likely improve food production.
“The Committee also noted the role of rising energy prices on the general price level due to its impact on factors of production.
“The recent increase in the price of Premium Motor Spirit (PMS) has also impacted the cost of production and distribution of food items and manufactured goods.
“The Committee was optimistic that the full deregulation of the downstream sub-sector of the petroleum industry would eliminate scarcity and stabilise price levels in the short to medium term.
“Members thus, reiterated the need to strongly forge ahead with the deepening collaboration between the monetary and fiscal authorities to ensure the achievement of our synchronized objectives of price stability and sustainable growth.”
