The Monetary Policy Committee’s (MPC) decision to maintain a hawkish stance and raise the benchmark interest rate has caused consternation not only in the financial industry, but also among organised private sector operators who believe the hike will further restrict their access to credit.
The MPC raised interest rates for the second time this year in an attempt to slow the country’s rapidly rising inflation. Following its two-day meeting last week, the committee increased the monetary policy rate by 100 basis points to 14% from 13%, while maintaining the asymmetric corridor at +100 and -700 basis points around the MPR, the CRR at 27.5%, and the liquidity ratio at 30%.
Its main reason for the hawkish stance is soaring inflation, which has risen to 18.6 percent as of June 2022, and is expected to rise further in July, with the year’s average hovering around 18 percent.
According to the CBN governor, the MPC has decided to keep raising benchmark interest rates as long as the country’s inflation remains high. However, private-sector analysts and operators argue that this decision is detrimental to economic growth.
Banks had readjusted their lending rates in response to the 150 basis point rate hike in May, which increased the MPR to 13% from 11.5 percent. Prior to the rate hike in May of this year, lending rates in the banking industry ranged between 12 and 40%, but as of July 15, lending rates ranged between 12 and 44%.
According to Dr Muda Yusuf, the founder and CEO of the Centre for the Promotion of Private Enterprise (CPPE), the tightening would only exacerbate the plight of those in the manufacturing sector and many entrepreneurs in this economy.
Noting that the move will result in higher lending rates, he stated that many entrepreneurs and manufacturers are already indebted to banks, “which means that the banks will now be reviewing the terms of the credit.”
“This is what happened the last time MPR was increased by 150 basis points.” So it will rise now, but it is unlikely to affect inflation. Two months ago, MPR was raised. Inflation has risen since then. Because this economy is not based on credit.” As a result, monetary policy tools cannot be used to correct an inflationary problem caused by supply side issues. There will be no tangible results; instead, it will make life more difficult for those who are investors in the economy, who are already dealing with a slew of issues. They are dealing with issues such as high diesel prices, high electricity tariffs, currency depreciation, high inflationary pressures, and deteriorating purchasing power. You’re also raising the cost of their credit. So I don’t think this is good for the economy because the economy isn’t as credit-driven as it used to be.
“In Nigeria, private sector credit to the economy is less than 20% of GDP.” It is over 100% in South Africa. The United States, to which we refer, has increased policy tightening by more than 200 percent. That demonstrates the amount of credit held by the private sector in comparison to what we have in Nigeria. So, in my opinion, it will not accomplish much. What we must do is concentrate on supply-side issues. Let’s see what you can do about the skyrocketing diesel prices. To see what we can do, we need to use fiscal policy measures such as import duties and tariffs. Our refineries need to be repaired. Let us consider what we can do about foreign exchange, which the CBN did not address adequately.
“There is a nearly N200 premium between the official window and the parallel market window.” MPC made no mention of it at all. This is a major emergency. We must also address the issue of food insecurity, which is causing food inflation because people are unable to work on farms. That we must address the extent to which the CBN is funding the government deficit. According to the reports, that is enormous, and it is also highly inflationary,” he stated.
According to Ayokunle Olubunmi, the head of Financial Institutions Ratings at Agusto & Co, the additional hike is unlikely to have any effect on taming inflationary pressures in the country. Noting that the MPC’s decision to tighten further caught everyone off guard. “We were of the opinion that they would hold the rates for now, at least for this meeting, and then we would probably see a hike from the next meeting,” he said.
“The question then is to what extent will the CBN continue to hike rates,” Olubunmi said, referring to the CBN governor’s statement that tightening will continue as long as inflationary pressures remain. The problem with inflation in Nigeria is that it is supply driven rather than demand driven, and it is primarily caused by forex and other factors.
“I don’t think this will tame inflation because, despite raising the MPR by 150 basis points at the last meeting, the rate on treasury bills remains very low.” Although banks have tried to raise their rates, the yield on treasury bills remains low.
mary, I doubt it will have a significant impact on inflation.
“This is because what is driving inflation is not an excess supply of cash, although what the CBN is probably trying to do is see if if the domestic market rate is high, it might discourage people from moving into dollar investment, keeping more money in the economy and reducing pressure on the exchange rate and reserves.”
“I doubt it will directly tame inflation.” The higher the rates, the more expensive it is for people to borrow, and the more expensive it is for people to borrow, the slower economic growth will be.
In addition, Cordros analysts stated in an emailed note, “prior to this meeting, we expected the Committee to keep the key policy rate unchanged to allow previous policy actions to fully permeate the economy while using development finance initiatives to ease supply constraints.” Although the Committee agreed with our assessment that the previous hike had not permeated the economy sufficiently, we believe the decision to hike was prompted by the higher month-on-month inflation reading in June.
“The higher month-on-month increase indicates that further tightening of monetary policy is required to effectively curb the persistent inflationary pressures.” Furthermore, we believe the MPC is attempting to be proactive – ahead of the US Fed, which is expected to raise its key policy rate by 75 basis points at its next meeting on July 27 – in order to limit the impact on the domestic economy.
“In fact, the Committee emphasised that the tightening was required to (1) signal the bank’s strong determination to aggressively address its price stability mandate and (2) narrow the real interest rate gap.” Further, the Committee stated that, while output growth remains fragile, failure to contain rising consumer prices now could undermine the modest gains made in improving consumer purchasing power, worsening poverty levels. As a result, the Committee advised the CBN to continue using its development finance initiatives to keep output growth in mind.
“Overall, we believe that the pace of monetary policy tightening by systemic global central banks at their July policy meetings, as well as what happens to global growth and inflation following that, will provide much-needed guidance as to how the MPC will react going forward.” If global inflationary pressures persist and key economies avoid recession, we expect global central banks to continue raising interest rates aggressively to combat persistent inflationary pressures.
“In that case, we anticipate the MPC raising the MPR by 50 basis points at its September policy meeting in order to limit external pressures in the face of rising yields in advanced economies.” However, if advanced economies do not avoid recession, we expect global central banks to slow their interest rate hike cycle. As a result, we anticipate the MPC deferring raising the MPR until the November policy meeting in order to reduce the burden on government borrowing costs.”
