Financial Analysts Weigh Pros and Cons of Adjustment in MPR

Godwin Emefiele

For two and a half years, the Monetary Policy Committee of the Central Bank of Nigeria held onto the Monetary Policy Rate of 11.5% until last week when it finally joined the global bandwagon of interest rate hikes. Festus Akanbi presents the views of financial analysts on the new monetary policy rate

Last week, the Central Bank of Nigeria’s Monetary Policy Committee finally succumbed to the rising inflationary trends by raising the benchmark interest rate by 150 basis points from 11.5 per cent to 13 per cent.

And as the Financial Derivatives Company of Nigeria puts it, the CBN finally joined the global and regional bandwagon of interest rate hikes, after maintaining the status quo ritual in 16 out of the last 18 meetings.

 It noted that official inflation climbing to 16.82 per cent in April (7.82 per cent) above the CBN’s target ceiling of nine per cent became the last straw that broke the camel’s back. This sharp rise in cost-push inflation compounded by a weak naira (N610/$), bleeding reserves and falling investor confidence eventually forced the apex bank to raise the monetary policy rate (MPR) by 150 basis points to 13 per cent p.a. – the highest level in 70 months. Interestingly, all 11 members of the committee voted for a rate increase.

 “The MPC increasing interest rates at a time of positive GDP growth (Q1’2022: 3.1 per cent) bodes well for the Nigerian economy. Since the MPR is an anchor rate and all other rates are expected to move in tandem, interest rates on fixed-income securities will rise. This could keep the country’s government-backed securities relatively competitive with other emerging market economies. Investors, even though cautious would be encouraged to maintain their Naira holdings and reverse capital outflows that have risen by 72 per cent in the last two years,” the FDC stated in a report last released shortly after the MPC meeting.

 Analysts, however, predicted that the time lag between policy and transmission impact on the economy will be much shorter this time, because of the charged political environment.

The MPC left other monetary policy parameters, including the apex bank’s Cash Reserve Requirement (CRR) and the Liquidity Ratio (LR), unchanged at 27.5 per cent and 30 per cent, respectively.

The MPR is the rate at which the apex bank lends to commercial banks and often determines the cost of funds in the economy.

New Threshold to Increase Cost of Borrowing

Addressing journalists at the end of a two-day meeting of the MPC, CBN Governor, Mr Godwin Emefiele, who read the committee’s communiqué, admitted that the hike in MPR would increase the cost of borrowing, especially in non-priority sectors of the economy.

Emefiele, however, added that lending to key priority sectors, which had been identified to boost growth and generate employment, would remain at a single-digit interest rate of nine per cent.

 The central bank governor pointed out that the decision to raise interest rate was the last resort and a difficult one for the MPC, which had been crafting policies to stimulate economic growth as well as achieve financial stability. He said the CBN had adopted a contractionary monetary policy stance given the aggressive rise in inflation in recent times, which had led to high food and commodity prices in the country. 

Emefiele noted that CBN’s action was aimed at curbing inflation, on the one hand, and supporting the growth of the economy, on the other. He said the MPC was in a dilemma in deciding to raise the lending rate. As a result, the apex bank governor explained, a drastic measure such as raising the benchmark lending rate was required to reduce monetary expansion to tame inflation.

He assured that though inflation was expected to maintain an aggressive acceleration in the coming months, the central bank would not hesitate to return to its accommodative stance whenever it saw a reduction in the headline index.

Signs of What to Come?

Reactions to the MPC decision are varied. While some analysts see the decision of the CBN to break away from the rigid position it held for two years as a sign of more fundamental steps to be taken, some commentators said much may not change until the Nigerian government stimulates production, build more infrastructure as well as protecting the little infrastructure in the country.

In her response to THISDAY inquiries, Chief Economist & Head of Research, Middle East & Africa, Standard Chartered Bank, Razia Khan said,  “Given the speed of acceleration in Nigerian CPI inflation, we had forecast a ‘token’ 50 bps hike.  The CBN has delivered much more than this with its 150 bps hike – which has the appearance of much more than just a token move.  

“The obvious question here is whether this might be the precursor to an FX policy that might make today’s tightening much more effective.  This could be the most important signal of eventual FX policy intentions yet – provided market rates can reprice.”

 In his intervention, the Group Executive Director in charge of the Investment Banking business at Cordros Capital Limited, Mr. Femi Ademola, said he cannot say if the rate hike will have any reasonable impact, despite the change of position by the MPC.

He said, “It is not certain if the rate hike will have any reasonable impact on inflation in Nigeria.” He recalled that several researchers have concluded that Nigerian inflation is a structural problem and not monetary (or liquidity) and that it is mostly cost-push than demand-pull. 

Lack of Adequate Infrastructure a Big Threat

Insisting the CBN moves might be coming too late to tame inflation, Ademola said as long as we don’t have adequate infrastructure or we are destroying the little we have; inflation may continue to be high. 

He argued that the exchange rate volatility is not due to excess liquidity but due to high import content in our domestic consumption. It is also related to the inadequate domestic infrastructure to boost production. 

He pointed out that the supposed liquidity surfeit appears to be mostly within the banking sector only, explaining that the real and productive sector of the economy suffers inadequate liquidity to expand and produce more.” 

 According to the Cordros Capital executive, although the CBN has promised to ensure that the key priority sectors of the economy get funding at single-digit rates, increasing the cost of borrowing for other sectors will likely increase the production cost and eventually lead to higher prices of the finished products. 

 On the immediate impact of the CBN policy on MPR, Ademola said there may not be any immediate effect on ordinary Nigerians, noting however that “if the CBN can keep to its promise of funding the key priority sectors, especially food production, food inflation, which has the largest weight in the CPI computation may be moderated to the benefit of ordinary Nigerians.”

 On his part, Founder and Chief Executive, Centre for the Promotion of Private Enterprise, Dr. Muda Yusuf said that given numerous headwinds that had posed significant risks to the nation’s economy, the hike in MPR by 150 basis points to 13% by the MPC did not come as a surprise. He listed such challenges to include the surge in commodity prices and impact on energy costs, a spike in domestic liquidity from electioneering-related spending, and global supply chain disruptions. 

 However, he maintained that whether the CBN decision last week would significantly impact inflation is a different matter. He noted that already, “bank lending has been constrained by the high CRR [many operators in the sector claim that effective CRR is as high as 50% or more for many banks], the discretionary debts by the apex bank, the 65% Loan to Deposit Ratio [LDR] and liquidity ratio of 30%. The lending situation in the economy is already very tight.”

 He explained that the transmission effects of monetary policy on the economy are still very weak, saying in the Nigerian context, price levels are not interest-sensitive.  Supply-side issues are much more profound drivers of inflation.  

 Talking about the expectations from the latest MPC’s decision, Yusuf said, “What the recent rate hike means for the economy is that the cost of credit to the few beneficiaries of the bank credits will increase which will impact their operating costs, prices of their products, and profit margins.  Investors in the fixed income instruments may also benefit from the hike.  There would be some adverse effects on the equities market.”

As Nigerians await the transmission of the new Monetary Policy Rate into the economy, all eyes will be on the apex bank to see if it can seize the current momentum to rejig the foreign exchange policies in a way to halt the current distortions and the attendant pressure on the naira.

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