CBN reverses course and adopts a tough stance against increasing inflation

Ken Ibenne

Ken Ibenne

The Central Bank of Nigeria’s (CBN) rate-setting arm reversed course on its stance on the country’s rising inflation yesterday, raising the monetary policy rate by 1.5 percent, or 150 basis points (bps), a dramatic move against rising prices.

A 150 basis point rise in MPR is an uncommon decision, one that the Monetary Policy Committee may not have made in previous years. With the move, CBN is forced to join the hawkish bandwagon, according to a recent Guardian report.

To keep inflation under control, the Federal Reserve System of the United States recently hiked its benchmark interest rate by 50 basis points, a decision it has not made in over two decades.

To combat inflationary pressure, the Bank of England, the Reserve Bank of India, and a number of other central banks have used contractionary monetary policy.

South Africa, Egypt, Ghana, and many other African countries have joined the hawkish trend. Ghana had taken a controversial stance, raising its interest rate by 200 basis points to 19 percent in a week, just two months after raising it by 250 basis points.

The CBN’s ‘bold’ decision came at a time when analysts throughout the world were raising red flags about a looming recession, predicting that European economies would not be spared.

The MPC members “expressed serious concern about the sustained escalation of inflationary pressure,” according to the CBN, who said that despite the steady improvement in output growth, the present rise in prices could stymie growth and prevent the economy from fully recovering.

“While the MPC highlighted a number of supply-side variables that could be contributing to inflationary pressure, new data suggests that money demand pressure is on the rise and unlikely to abate until after the 2023 general elections.” As a result, the Committee’s challenge at this meeting is how to best drive down domestic prices while maintaining the fragile recovery,” it concluded.

Six of the ten members present voted in favor of a 150bps increase. At the asymmetric corridor of +100/-700bps around MPR, 27.5 percent and 30%, respectively, other essential metrics asymmetric corridor, cash reserve retention (CRR), and liquidity ratio (LR) were maintained unaltered.

With local manufacturing capacity remaining inadequate, resulting in an over-reliance on imported goods (as the CBN has often conceded) and a falling naira, it is unclear how limited liquidity would help to alleviate inflation, which hit 16.8% last month.

An increase in the benchmark increase rate might potentially mean increased borrowing costs for both individuals and businesses, which are already dealing with a difficult finance environment. It also implies that the government will pay a higher interest rate on domestic borrowing.

“What the recent rate hike means for the economy is that the cost of credit for the few beneficiaries of bank credits will increase, which will impact their operating costs, product prices, and profit margins,” said Dr. Muda Yusuf, Chief Executive Officer of the Centre for the Promotion of Private Enterprise. The increase may also help investors in fixed income securities. The stock market would suffer some negative consequences.”

Yusuf also dismissed the idea of lowering inflationary pressures by simply raising interest rates, claiming that “bank lending has been hampered by the high CRR (many operators in the industry believe that effective CRR is as high as 50% or more for several banks).”

He went on to say that the LDR of 65 percent and the LR of 30 percent already make lending excessively tight.

Nigerian commercial loans are among the most expensive in the world, with borrowers paying roughly 24% plus a few extra fees. To allow manufacturers a fair headroom, experts say the financial climate must be liberalized.

Dr. Peter Ozo-Eson, the Nigeria Labour Congress’s (NLC) immediate past General Secretary, said the CBN’s interest rate boost will attract portfolio investors and encourage savings.

He went on to say that growing inflation needed an increase in the interest rate.

“The issue is that we have had substantial inflation in recent times,” he says. Inflation is growing, and keeping the interest rate at a particular level is theoretically inadvisable in this situation. This is because the rate sets the tone for all other rates. If we want to mobilize savings for investment objectives, we can’t do so at a rate lower than inflation since people won’t want to save their money at that rate.

“Given the direction of inflation and the tenacity of its rise in recent years, as well as other global variables, the interest rate was bound to rise.” The reality of economic pressure will determine which path is taken. Given the general economic condition, notably inflation, I believe that moving up at this time was the proper decision.”

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