James Emejo assesses the rationale for the apex bank’s resolve to raise benchmark interest rates during a period of economic hardship
No doubt, the recent decision by the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) to raise key monetary policy instruments amid the current economic difficulties didn’t sit well with many Nigerians especially analysts who didn’t see it coming.
In one of its most audacious responses yet to the ravaging inflation in the country, the central bank raised the Monetary Policy Rate (MPR), which is the benchmark interest rate, by a whopping 400 basis points to 22.75 per cent from 18.75 per cent in one fell swoop.
The bank also adjusted the asymmetric corridor around the MPR to +100/-700 basis points from +100/-300 basis points as well as the Cash Reserve Requirement (CRR) to 45 per cent from 32.5 per cent and retained the Liquidity Ratio at 30 per cent.
It was the first under the reconstituted committee led by Yemi Cardoso, who had been voicing the bank’s concerns over the quantum of money supply in the economy which he attributed mostly to the high inflationary environment.
Even though many had read the body language and possible direction of the apex bank – to raise the MPR –the magnitude and percentage of the rate hike beat all expectations. Notable economists including the Chief Executive, Financial Derivatives Company, Mr. Bismarck Rewane, had before the MPC meeting predicted a further tightening of monetary policy tools– but in the region of between 200 and 250 basis points to tame headline inflation which stood at 29.90 per cent in January 2024.
The MPR is the rate at which commercial banks borrow from the apex bank and often determines the cost of funds in the economy and analysts worry that increasing the rate would further complicate the already difficult economic conditions for Nigerians, who have been enduring the impact of recent economic decisions by the government.
At the inception of the President Bola Tinubu-led administration, the government announced the removal of the petrol subsidy and also floated the Naira – two major policy changes that have been largely blamed for the current economic quagmire.
Monetary tightening foretold
The CBN has the mandate to fight inflation to achieve monetary and price stability in the economy. Cardoso had repeatedly declared that the central bank under his watch would be committed to inflation -targeting which he believed was caused by too much money supply through the various interventions of the bank under the previous leadership.
Liquidity Surfeit
In his recent interview on ARISE News, the broadcast arm of THISDAY Newspapers, the CBN governor clarified that he had nothing against the central bank’s interventions in the economy, pointing out that this remained a standard practice globally, especially in times of crisis. However, he said such interventions needed to be well thought out in order not to destabilise the economy.
According to him, there is too much liquidity that had been injected into the economy in a relatively short space of time which he said was particularly detrimental to monetary policy.
Cardoso explained that loans and advances to the economy stood at about N40 trillion of which CBN interventions accounted for about 25 per cent or N10 trillion. He insisted that such liquidity injections were responsible for the current distortions including inflation in the economy because these interventions were not properly managed.
He argued that the central bank currently lacked the capacity for direct interventions and would rather focus efforts on its primary mandate to control inflation, stabilise prices, and ensure a stable economic environment.
Options for tightening in periods of hardship
Generally, central banks may raise monetary policy tools during periods of economic hardship and high inflation to address various economic challenges and achieve specific policy objectives.
Given that high inflation erodes purchasing power, reduces consumer confidence, and leads to economic instability.
Against this backdrop, the CBN may raise interest rates to make borrowing more expensive, thereby reducing consumer spending and investment.
By tightening monetary policy, central banks aim to rein in inflationary pressures and maintain price stability.
The CBN also aims to maintain currency stability because high inflation could potentially erode the value of the Naira, leading to depreciation and potential currency crises.
The apex bank here had the option to raise interest rates to attract foreign capital, support the currency, and maintain its stability in international markets as a stable currency remains essential for trade, investment, and overall economic confidence.
Furthermore, by tightening policy tools, the CBN seeks to reduce speculative behaviour which a high inflation environment can encourage as currently evidenced in the country – as investors seek to protect their wealth by investing in assets that offer higher returns than cash.
By raising the MPR, CBN makes speculative investments less attractive, encouraging more prudent financial behavior and reducing the risk of asset bubbles.
Essentially, raising monetary policy tools during periods of economic hardship and high inflation is aimed at restoring economic stability, preserving the value of the currency, and anchoring inflation expectations to support sustainable economic growth in the long term among others.
Cardoso, however, justifying the CBN tightening stance said: “Firstly, I hope you can see from the decision that has been announced concerning our policy stance and monetary policy rate that clearly, we are out to tighten the money supply and to ensure that we have a robust structure in place as far as monetary tools are concerned to rein in inflation.
“We expect that this would moderate in the short to medium term, but interestingly, we also appreciate the fact that there is a structure side to inflation which we intend to work very closely with other arms of governments in particular, the fiscal side. He said it was important that the government managed the challenges of insecurity and that agricultural productivity was also improved as well as issues of the oil and gas sector.
He added: “We hope to collaborate very strongly with the fiscal side so that the other elements of inflation that are not directly within our control to be managed a lot better and a more positive outcome will come to the benefit of all Nigerians.”
Analysts’ perspectives on tightening regime
In separate interviews with THISDAY, analysts have, however, reacted to the CBN’s major rates announcements.
They believed that the factors fueling inflations were more of non-monetary activities.
Reacting to the apex bank’s 400 basis points increase in MPR, and CRR adjustments, President, Association of Capital Market Academics of Nigeria, Prof. Uche Uwaleke, described the move as an “overkill”.
He told THISDAY that “jerking up the MPR by 400 basis points in one fell swoop is simply an overkill”, adding that the real sector would likely suffer from the impact.
He said: “The implication is that for every deposit in the bank, CRR takes 45 per cent of it while the Liquidity ratio takes 30 per cent. So, it is only 25 per cent of the deposit that banks can lend.
“This has negative implications for access to credit, cost of capital for firms, cost of debt service by the government, and asset quality of banks.
“Expect banks to quickly reprice their loans with negative consequences for non-performing loans and financial soundness indicators.”
Uwaleke said: “By this overkill on the economy in a bid to crash elevated inflation which by the way has numerous non-monetary factors driving it, output is bound to shrink.
So, expect lower GDP numbers, especially from agriculture and Industry sectors as well as a surge in unemployment levels.”
Also, Wealth Management and Business Development Consultant, Mr. Ibrahim Shelleng, said the recent hike by the apex bank aims to tackle inflation in two ways – mopping up excess system liquidity, which has tended to find its way into the parallel market via speculative FX purchases, and to attract foreign portfolio investments to boost FX liquidity, adding that high interest rates on sovereign securities may be an attractive proposition for yield-seeking investors.
He pointed out that the previous administration increased the money supply to unprecedented levels through the ways and means borrowing, and that has ultimately had a large impact on inflation – hence the little or no impact on inflation despite numerous previous MPR hikes by the bank.
Shelleng, on the other hand, said: “The monetary tightening is to the detriment of growth and productivity as high interest rates increase borrowing costs for businesses.
“Due to the cost-push nature of Nigeria’s inflation, the CBN is trying to tackle the supply constraints by trying to bring down the FX rate, thereby making imports cheaper.”
On his part, Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, said: “Although I expected an increase in MPR at the just concluded MPC meeting, I didn’t expect the magnitude of increase in MPR from 18.75 per cent to 22.75 per cent.
“The new rate was targeted at checking the inflation rate, which has grown to 29.9 per cent as at the end of January 2024. We expect that this rise in MPR will make every deposit money bank adjust its lending rate and reduce money in circulation.”
The former Director General, Abuja Chamber of Commerce and Industry (ACCI) said: “This will reduce pressure on foreign currency and Naira funds that would have increased demand for more foreign currency.”
According to him, “When lending rates rise, productivity will reduce as the cost of production will rise. This cost will be passed over to the ultimate consumers at high prices. “The inflation rate, which is being targeted for reduction, will increase ultimately. We will experience a vicious cycle. This is because there are other factors contributing to the rising inflation rate outside the control of monetary policy.”
Also, in his intervention, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, said the magnitude of MPR hike was a shock as he predicted a raise of between 100 to 200 basis points to monitor the economy.
He said: “It is a known fact that there is a need to raise the MPR to bring down inflation but other considerations have to be looked into side by side with the increment in the MPR.
He said the CRR adjustment would limit the allowable cash for loan facilities and consumer credit would be seriously affected.
Gbolade said, “The manufacturing sector which has been suffering multiple hits from inflation, naira devaluation, and loss of revenue will now have to face higher interest rates in their loan repayment with banks.
“This could be inimical to the economy that the government is trying to rejuvenate and could bring it to its knees. It could also lead to unemployment and other dire consequences.
“In the past CBN administration, constant increase in MPR was employed but it did not yield results because of other underlying factors. In all, it is left to be seen how these measures would stem inflation in the coming months.”
Meanwhile, central banks have also used MPR hikes and other monetary tools to discourage consumer spending by making it difficult to patronage certain goods and services with the hope that low demand will force down prices.
Interestingly, the MPC will reconvene later in the month to assess the impact of the recent policy direction to take further actions as it deems necessary.
