Analysts: Rates Retention Would Reduce Inflation, But Hurt Manufacturers


Olaseni Durojaiye looks at the outcome of the last Monetary Policy Committee meeting and how stakeholders are taking it

There were expectations that the last meeting of the Monetary Policy Committee that ended in Abuja on Tuesday would decide to reduce the monetary policy rate, which is the benchmark interest rate. Being what dictates lending rates for deposit money banks, many operators, especially in the real sector, continued to nurse the hope that the rates would be reviewed downwards, even as that hope had been dashed at previous meetings.


As it turned out, the MPC retained all the policy rates at their current level in order to maintain tight monetary stance. Governor of the Central Bank of Nigeria Godwin Emefiele announced the decision of the committee at the end of a two-day meeting held in Abuja. Emefiele explained that eight out of the nine members of the committee that attended the meeting agreed to maintain the current monetary policy stance.

According to him, apart from the Monetary Policy Rate, which was retained at 14 per cent, the committee also retained the cash reserves ratio at 22.5 per cent. The committee has maintained this rate for two consecutive years. Also retained are the Liquidity Ratio, which was left at 30 per cent, and the Asymmetric Window, which was left at +200 and -500 basis points around the MPR.

Mixed Grill

The committee had In July 2016 hiked interest rates to combat rising inflation at that time. The MPC has retained the MPR at 14 per cent for 11 consecutive times, with operators across different sectors of the economy lamenting the high cost of credit, which they said was militating against growth in the non-oil sector.

In arguing for a southward review of the lending rate, proponents have repeatedly said there is need to stimulate businesses in the non-oil sector, adding that one of the key roadmaps to doing so is access to affordable credit. Their argument has always been that unless non-oil businesses are stimulated to stand firmly and contribute meaningfully to the nation’s GDP, growth in the system would slow down.

However, the flipside of the argument remains the need to protect foreign portfolio investment. Rate retention, proponents argue, would protect portfolio investment, maintain the fragile balance in the volatile FX market, and sustain the steady decline in inflation rate.


The decisions reached at the latest meeting of the MPC have continued to elicit reactions from operators in the economy.

Director-General, Lagos Chamber of Commerce and Industry, Muda Yusuf, in an interview with THISDAY,  argued that portfolio investments were not the best. “We should focus more on domestic investors and Foreign Direct Investment from monetary policy perspective,” he stated.

Yusuf along with President of Manufacturers Association of Nigeria, Dr. Frank Jacobs, who both canvassed lowering of the MPR, believed lowering the rate would trigger growth in the real sector, and boost employment generation potentials of the sector with its attendant economic benefits for the economy.

Jacobs expressed displeasure at the retention noting, “The decision would adversely affect the manufacturing sector.”

Yusuf was, however, not surprised about the MPC decision. “It was predictable and not surprising. The key variables suggested there will be no change, inflation is still at double digits, unemployment is still high while growth rate is declining in some key sectors with potential for employment generation and poverty alleviation,” he explained.

In its own reaction, a research analyst at the Nigeria Economic Summit Group, Rotimi Oyelere, explained, “The MPC missed the opportunity to lower the benchmark lending rate in its first MPC meeting for the year. The economy could absorb such adjustment to find new equilibrium for rates with minimal distortion to investment and growth. Already, Gross Domestic Product growth slowed in Q1 2018 compared with Q4 2017.

“Looking at all scenarios to economic growth for the Nigeria economy in the near term, holding the key monetary rates appears most cautious against the backdrop of the delayed passage of the 2018 budget. Moreover, there is a need to curtail inflationary pressure that will come with election spending that is about to kick start.”

Oyelere further explained, “In an economy where unemployment is rising, it is imperative to reflate the economy by lowering lending rates to make credit affordable to the productive/real sector, like agriculture and manufacturing, which create plenty of the jobs in Nigeria. 

However, there is a need to keep real interest rate in the positive territory to sustain the momentum of savings and portfolio investments at least in the near term.

“This is critical at this time because a dull or potentially bearish market could fuel foreign portfolio investment apathy, making returns on investment subdued.

 This will result in massive capital flight and investment withdrawers by foreign portfolio investors who are waiting on the side-line.

 This will, therefore, have a pass on effect on foreign exchange availability and trigger another around of exchange rate crisis.”

Another economist and policy analyst at NESG, Wilson Erumebor, said the MPC’s decisions were based on the need to be cautious with the economy at this time when there is some improvement in macro-economic indicators, including external reserves, progressively dwindling inflation rate, among others.

Erumebor said, “The decision of the MPC is a good move at the moment given the recent inspiring GDP figures; inflation figure is still high but dropping as well as improvements in external reserves at $48.5 billion. Given the above macro indicators, what the CBN has done is to adopt a cautious, wait and see approach, and tries to understand how the key indicators will be for the next six months.

“The option open to the CBN is to increase, reduce, or retain the MPR. Reducing the rate at this time would have negative impact on the FX rate, create some nervousness and expedite current investment flight. The other option is to increase lending rate, but that is already high and doing so will increase lending rate.”

However, Jacobs told THISDAY, “We’re very disappointed at the retention of the rate. We’ve always advocated a reduction in the lending rate, especially to the manufacturing sector, and we have made our position know through the National Industrial Council and the Presidency. The continuous retention of the rate is affecting the manufacturing sector adversely.”

But Erumebor insisted that the CBN was also cautious not to trigger inflation. According to him, by the time the budget is passed, it will trigger a lot of spending and that will raise some inflationary pressures. “These are some of the concerns and the CBN has to be alert to some of these concerns for the good of the economy,” he said.