Fighting Inflation, CBN Raises Interest Rate

•MPR now 14%

•Says monetary tightening may continue if consumer price index rises further

•To disburse N20bn as rebates to exporters for RT200

Nume Ekeghe in Lagos and James Emejo in Abuja

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) yesterday raised the benchmark Monetary Policy Rate (MPR) by 100 basis points from 13 per cent to 14 per cent, citing rising inflationary pressure across the world.

The development which was part of the resolutions reached at the end of the 286th meeting of the MPC which took place in Lagos, came exactly two months after the committee had at its last meeting held in May had raised the MPR by 150 basis points from the 11.5 per cent it was previously.

CBN Governor and Chairman of the MPC, Mr. Godwin Emefiele, during a media briefing at the end of the two-day meeting warned that the MPC would continue to raise benchmark interest rates as long as inflationary pressure continues.

However, the Committee retained the asymmetric corridor at +100 and -700 basis points around the MPR, retained the cash reserve requirement (CRR) at 27.5 per cent and retained the liquidity ratio at 30 per cent.

 Emefiele explained that the decision to raise the MPR was reached due to MPC members’ concerns about rising inflation which had risen to 18.6 per cent in June.

He said: “MPC noted with concern the continued aggressive movement in inflation even after the rate hike in the last meeting and expressed its unrelenting resolve to restore price stability while providing the necessary support to strengthen our fragile economy.

 “As regards the decision whether to tighten or hold, the committee was unanimous and so did not consider both loosening and retaining rates at existing levels at this meeting.

“On loosening, the MPC felt it would worsen the existing liquidity conditions in the economy and further dampen the money market rate necessary to stimulate savings and investments. Members also felt that loosening would trigger the weakening of the exchange rate which could pass through to domestic prices.

“MPC did not also consider holding because it suggests that the bank is not responding to both global and domestic price development as inflation numbers continue to trend upwards.”

Speaking further, the CBN Governor said on tightening, members were anonymous that given the aggressive increase in inflation, coupled with the resultant negative consequences particularly on the purchasing power of the poor as well as retarding growth, there was need to continue to tighten monetary policy.

According to him, however, the policy dilemma was hinged around the level of tightening needed for inflation without dampening manufacturing output which could result on a higher cost of borrowing.

He, therefore said, the “committee resolved to increase the MPR by 100 basis point from 13 per cent to 14 per cent. Retain the asymmetric corridor at +100 and -700 basis points around the MPR, retain CRR at 27.5 percent, and retain the liquidity ratio at 30 per cent.”

Shedding more light on the inflationary pressure being felt in the country, Emefiele said: “Today, the last data released just about a few days ago was 18.6 per cent. MPC members feel we cannot just hold or continue to watch inflation grow the way it is rising. Something must be done to rein in inflation.

“We conducted a very serious analysis of data presented to us at this meeting. And we felt that there was need, not just because we want to look at what other economies are doing, but also the fear that whereas we are seeing some output growth as a result.

“So, essentially, with what we are doing in terms of development finance, we need to do a lot more work to rein in inflation. MPC did not even take any look at the issue of whether to hold rate constant or to loosen it.”

“Some analysts say we should not continue to increase rates because we have increased cost of borrowing for the borrowers and that it may also weaken manufacturing output. We agree with that postulation

“The important thing is that as long as we see inflation at the level that can retard growth, it must be dealt with while at the same time we are looking at how to use our development finance tools to do continue to push towards improved output growth.

“That is what we’re doing. The MPC is very determined that if inflation continues at this rate, particularly aggressively, we will continue to tighten because that is the only thing that I can say at this time.”

 Furthermore, Emefiele pointed out that: “Inflation can be a terrible scourge and what that means is that it is capable of totally obliterating the purchasing power of citizens of the country particularly the weak, vulnerable and the poor.

“By the time it weakens the purchasing power of the vulnerable, naturally it will also lead to heightened unemployment and will ultimately retard growth. We have to be very careful about the rate of acceleration of pricing or inflation, it is a very serious matter to the policy committee because as inflation continues to trend higher it would no doubt adversely begin to retard growth.”

 Emefiele noted that many economies, both developed and developing, have had to embark on very aggressive rate increases so as to dampen the size of inflation.

“Nigeria, what we have done in our own attempt to pursue a policy of price stability that is conducive to growth is that we have tried at a couple of meetings to leave rates the way they were, but at the same time we are pushing on how to improve output.

 “But of course, with the aggressive acceleration of inflation rates in Nigeria, we decided in May after almost two and a half years to raise interest rate by 150bps. We need to do more work on inflation.”

Commenting on the Race to $200 Billion in FX Repatriation (RT200) programme and the ‘100 for 100’ initiative, he said both had recorded gains in increasing foreign exchange inflows into the country.

“The MPC was delighted that we are making progress with these initiatives. We are making progress for the ‘100 for 100. I think we have disbursed slightly above N50 billion to the ‘100 for 100’ which is meant to really drive support for those who want to produce goods that can be exported out of the country to earn dollar revenues.

 “Indeed, we are delighted that the RT200 is yielding good results. We found out that we had received inflows as at June this year of over $2.9 billion. You all know that during the first quarter of 2022, we disbursed N3.6 billion as rebates for those who conducted export activities.

“Hence, for Q2 2022, we have this morning just approved the release and payment of rebates those who conducted the export activities to the tune of N20 billion.

“This is because whereas we found out that, yes, there has been a lot of exports, but those exports found to be eligible for the rebates were in the tune of over $600 million and that is the reason we are paying slightly over N20 billion for Q2. We are very happy and delighted that a lot more people are embracing exports in Nigeria.

“We had hinted that at some point, we will get to the point where the banks will not even need to come to the CBN to buy FX to meet important needs of their customers. We are delighted that we are moving gradually in that direction and I am optimistic that these numbers will improve by around the end of the year.”

Analysts React to Interest Rate Hike

Meanwhile, analysts have reacted to the decision by the apex bank to further hike MPR to 14 per cent, pointing out that the resolve was not unconnected to the trend where most central banks globally have raised interest rates in reaction to the inflationary pressure caused by the Russian-Ukraine war.

They said the move could also signal panic on the part of the CBN and heighten uncertainty.

Also, the said the CBN needed to reconsider its decision on continuous interest rate increases and explore policies that could stimulate economic growth.

The analysts also predicted higher cost of borrowing, widening government deficit, slower economic growth, rising unemployment and bearish stock market in the coming months following the upward rate adjustment.

Speaking with THISDAY, the Chairman, Chartered Institute of Bankers of Nigeria (CIBN), Abuja Branch, Prof. Uche Uwaleke said: “The hike in the MPR in quick succession from 11.5 per cent to 13 per cent in May and now to 14 per cent could signal panic on the part of the CBN and heighten uncertainty.

“This policy stance may not necessarily curb inflationary pressure given that the pressure is not coming from monetary factors, but from high costs of petroleum products, electricity and insecurity. Ditto for rising Exchange rate.

“So, expect to see in the coming months higher cost of borrowing, widening government deficit, slower economic growth, rising unemployment and bearish stock market.”

On his part, the Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, noted that the increase to 13 per cent last month did not have any considerable effect on inflation.

He said, “It is my believe that this recent hike will further compound the economic problems we are facing because cost of funds will rise sharply as it did last month due to the increase in MPR rates.

“The economy needs to be robust to be able to curb inflation but presently this increase in interest rate will affect manufacturers and businesses which will make the environment harsher that it was and limit economic activities.

“Lending rates will increase thereby leading to high cost of production and the cost will be passed to consumers who are already suffering the harsh economic policies of the government.”

He said: “The CBN needs to rescind its decision on continous interest rate increases and look at policies that can stimulate economic growth because that is what would stem the rising inflation being experienced presently.”

On his part, the Managing Director/Chief Executive, Credent Investment Managers Limited, Mr. Ibrahim Shelleng, said the continuous contractionary policy by CBN was as a direct response to global inflationary pressures.

He pointed out that central banks globally have all raised interest rates in reaction to the inflationary pressures caused by the Russian-Ukraine crisis.

He said while this could be understood in the context of developed countries wanting to reduce demand pull inflation caused by supply shocks, “I am not convinced that this same stance will be effective in developing countries where the dynamics are different.”

Shelleng said: “Firstly, in a country like Nigeria with a huge underbanked population, the effects of monetary policy are not as far reaching and therefore the impact on the economy tends to be minimal.

“Secondly, given Nigeria’s stagflation (low growth, high inflation, high unemployment) the changes in MPR has had little effect in curtailing the situation, albeit with blame also lying on the fiscal side.”