The Monetary Policy Committee (MPC) confirmed its willingness to continue with an aggressive monetary tightening should the inflation rate continue to climb yesterday by raising the benchmark interest rate by 100 basis points (bps), from 13 to 14 percent.
The Central Bank of Nigeria’s (CBN) Committee, which sets interest rates, will increase the lending rate for the second time in two months and for the third time in more than 2.5 years.
The monetary interest rate (MPR) is still 460 basis points (bps) higher than the inflation rate, which increased by almost 80 bps to 18.6% in June notwithstanding the review.
MPR establishes the commercial loan rate for the economy, however some economists object to the transmission’s effectiveness, claiming that the financial sector must still develop significantly before the benchmark is useful.
Six of the 11 participants at the two-day meeting, according to the Committee’s chairman and governor of the top bank, Godwin Emefiele, decided to uphold the decision. MPR kept the cash reserve ratio (CRR) and liquidity ratio at 27.5 and 30%, respectively, and kept the asymmetrical corridor at +100 and -700 bps around the MPR.
At a press conference to discuss the meeting’s results, Emefiele stated that if inflation keeps rising in a way that slows growth, the Committee “will not promise that it would not continue to increase the interest rate.”
The head of the CBN stated that notwithstanding the prior interest rate review, the MPC was concerned about the ongoing increase in the inflation rate. However, he noted that worries about inflation were not unique to Nigeria.
Emefiele claimed that both supply and demand issues contribute to the country’s inflation, with the central bank using the appropriate monetary tools to address the former. He continued by saying that its initiatives in many economic areas have greatly reduced supply-side pressure.
He believes that high inflation poses a risk to economic expansion. He expressed confidence that output, which increased by 3.1% in the first quarter, will continue to grow, but he also cautioned that big dangers to growth include COVID-19, the European war, and the aggressive global monetary normalization.
The CBN stated that it would respond to ongoing inflationary pressure with interest rate adjustments, but experts believe that given the impending large scale elections, rising oil prices, and other supply-related issues, inflation will continue to rise in the coming months.
It’s time to act, according to Kelvin Ayebaefie Emmanuel, chief executive officer of Dairy Hills Limited, as inefficient power is the first barrier to supplying energy to the industrial sectors.
The Nigerian Electricity Regulatory Commission (NERC) has a captive energy policy that allows the private sector to build power plants and mini-grids with a maximum capacity of 10 megawatts to supply electricity to specific economic sectors. The governors of the 36 states in the nation, including Abuja, will have the authority to invite bids from private enterprises to build independent power plants and mini-grids that supply electricity to businesses, he added.
He also urged the CBN to pay off its estimated N19 trillion overdraft to the Federal Government.
“Another option to control inflation is for the CBN to reclaim the advances it made the Federal Government, which are above the 5% as specified in the CBN Act 2007 to lower the amount of cash available in the economy,” he said. Additionally, it must to stop the current quantitative easing program. The CBN’s final monetary policy tool for combating inflation is this weapon.
He emphasized that in order for Nigeria to lower its import costs, the CBN must collaborate with the fiscal authority to execute backward integration of important sectors.
He stated that Nigeria must add value to the exports it is now making, particularly in the exports of shea butter, millet, cassava, and ginger, among other agricultural products.
Emmanuel noted that there are three to four million tonnes of paddy for millers in Nigeria to use instead of importing rice as he praised the CBN’s participation in the growth of rice in Nigeria.
According to Taiwo Oyedele, Fiscal Policy Partner and Africa Tax Leader at PwC, monetary instruments by themselves are insufficient to combat the current inflation.
Oyedele said that rather than depending primarily on increasing the monetary policy rate, the government should implement a variety of complementing policy measures to handle the nation’s skyrocketing inflation rate.
There is a need to address the inefficiency in the energy supply value chain, reduce reliance on CBN overdraft, and suspend recently introduced taxes on some goods, like the excise duty on non-alcoholic beverages, given that the main causes of inflation include rising food prices, higher energy costs, as well as scarcity experienced in some parts of the country with an impact on transportation costs.
The rate increase “was unexpected, but not desirable,” according to Dr. Muda Yusuf, an economist and former director general of the Lagos Chamber of Commerce and Industry (LCCI).
“Although the choice was consistent with the worldwide trend of Central Banks tightening policy, it overlooked domestic characteristics. Nigeria’s inflation is primarily caused by supply-side factors rather than demand. The last 150-bps increase in the policy rate in May had no appreciable effect on the inflation figures. In fact, the level of prices rose much further as a whole.
“We acknowledge that the CBN’s fundamental purpose is price stability, but a number of challenges have put this important goal at serious risk. Among these include the rise in commodity prices and their effect on energy prices, the negative consequences of insecurity on agricultural output, and interruptions to the world supply chain. These factors wouldn’t change as a result of the MPR increase, the economist stated.
He pointed out that the lending environment for commercial banks was already excessively restrictive because many claim the actual CRR is as high as 50% because of “the discretionary debts by the apex bank.”
Contrary to many advanced economies, which have significantly higher levels of financial inclusion, a solid consumer credit system, and a strong link between interest rates and aggregate demand, the Nigerian economy is not credit-driven. The informal sector makes up close to 50% of the GDP in Nigeria, and financial inclusion in the country is still fairly low. Access to credit for households and MSMEs is therefore still very difficult.
Many experts have urged the CBN to adopt a more flexible CRR so they could change the reserves in real time in reaction to changes in the amount of reserves kept by certain banks.
Yusuf emphasized, like others, that prices are not interest rate sensitive, and that the transmission effects of monetary policy on the economy are consequently still relatively weak.
The few people who benefit from bank credits will now pay a higher cost of credit, which will have an effect on their operating expenses, product prices, and profit margins, he continued. The increase can have a negative effect on the stock market.