In this piece, James Emejo writes on the positive impact of the current Monetary Policy Rate (MPR) on the Nigerian economy
Only last week, the Monetary Policy Committee of the Central Bank of Nigeria
(CBN) resolved to raise the Monetary Policy Rate (MPR), otherwise known as interest rate by 50 basis points to 18.5 per cent from 18 per cent.
The MPR is the rate at which the apex bank lends commercial banks, and often determines the cost of funds in the economy.
The CBN had maintained a contractionary monetary policy stance since May 2022, in response to growing inflationary pressures in the country.
Ideally, a hike in interest rate is a major concern for an economy because borrowing from commercial banks becomes expensive and this is transferred to final consumers of goods and services in the form of higher prices.
Inflation refers to the general increase in prices of goods and services in an economy over time and often impacts purchasing power. It occurs when too much money chase after fewer goods.
Although inflation can have various effects on an economy, some moderate inflation is considered normal and even desirable, as it encourages spending and investment. However, high or hyperinflation can be detrimental to an economy, leading to a decrease in the value of money, reduced purchasing power, uncertainty, and economic instability.
Nigeria’s inflation which is currently recorded 22.22 per cent in April is considered to be worrisome for the economy.
Hence, central banks and governments globally often implement monetary and fiscal policies to manage inflation, using tools such as adjusting interest rates, controlling the money supply, and fiscal measures to stabilise prices and maintain economic stability.
However, some analysts have criticised the central bank over its continued hike in MPR, arguing that it has not been effective in curbing the headline index.
Yet, analysts also attested to the fact that Nigeria’s inflationary pressures are largely associated with structural issues including insecurity which had stifled agricultural production thereby impacting food production.
Often times, food inflation constituted the biggest contributor to inflation in the country. Yet, it is the job of the fiscal authority to ensure that the environment is made safe enough for farmers to return to farming. But there are other factors contributing to inflation.
The MPC noted the persisting uptick in inflation as headline inflation (year-on- year) rose to 22.22 per cent in April 2023 from 22.04 per cent in the preceding month, adding that this amounted to a moderate increase of 0.18 percentage points.
He said the recent uptick was driven largely by the increase in both the food and core components, which rose moderately to 24.61 and 20.14 per cent in April 2023 from 24.45 and 19.86 per cent, respectively, in March 2023. Emefiele, said the moderate hike in MPR was taken to further rein in inflation, adding that the lingering insecurity in major food-producing areas; high cost of transportation driven by rising energy costs; activities of middlemen in the food distribution channels as well as the persistence of shocks from legacy infrastructural bottlenecks, remain major drivers of the inflationary pressure, coupled with the global headwinds from the ongoing Russia – Ukraine war.
Persisting Inflationary Concerns
According to the CBN Governor, Mr. Godwin Emefiele, the bank had noted that
the moderate hike in MPR was taken to further rein in inflation, adding that the lingering insecurity in major food-producing areas; high cost of transportation driven by rising energy costs; activities of middlemen in the food distribution channels as well as the persistence of shocks from legacy infrastructural bottlenecks, remain major drivers of the inflationary pressure. Emefiele said the committee was concerned that despite the tight monetary policy stance adopted since its May 2022 meeting, inflation had not decelerated towards the bank’s long-run objective, pointing out that the continued rise in headline inflation, albeit moderately, remained the biggest challenge confronting macroeconomic stability in Nigeria.
He said, “Headline inflation in the view of members, remained high due largely to a host of non-monetary issues outside the reach of the central bank such as the perennial scarcity of Premium Motor Spirit (PMS) and expectations of short-term hikes in the pump price of PMS; high and rising price of various energy sources; and a host of headwinds confronting the food supply chain.”
Justification
Following criticisms from some quarters that the continued hike in the benchmark interest rate had not helped to douse inflation, the CBN governor explained that
but for the contractionary monetary stance adopted by the bank since May 2022, the country’s inflationary pressures would have been higher by over 800 basis points.
Emefiele particularly noted that the without the bank’s efforts, inflation would have been 30.48 per cent compared to the current 22.22 per cent recorded in
April, adding that the MPC remained convinced that monetary actions so far deployed had impacted positively on the economy.
He said if the central bank had not taken aggressive actions along the line inflation would have been currently unbearable for Nigerians.
Having exhausted monetary policy options in dealing with inflation, and given that the fiscal authority had been failing to play its part to curb inflation, the MPR remained the only potent weapon for addressing the headline index from the monetary perspective.
Ideally, the CBN would raise the MPR – where demand is higher than supply – in order to make it difficult for consumers to be able to purchase goods.
The idea is that by weakening the purchasing power of consumers, the sellers would be forced to sell at a cheaper price, thereby reducing inflation.
Analysts’ Perspective
However, various experts have questioned the continued hike in interest rate as a way of addressing inflation, arguing that it is putting more hardship on Nigerians.
Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, said the MPR hike in reality had not halted the rise of inflation, pointing out that other factors including weak naira due FX fluctuations and high cost of doing business are contributory factors to inflation.
President Association of Capital Market Academics of Nigeria, Prof. Uche
Uwaleke, said the latest increase in interest rate ‘may do little to halt upward trend in inflation as recent experience has shown’.
He however admitted that any significant moderation in the inflation rate could only come from dealing with supply-side factors and structural issues fuelling
rising prices such as insecurity, electricity and fuel challenges.
On his part, Managing Director/Chief Executive, Dignity Finance and Investment
Limited, Dr. Chijioke Ekechukwu, agreed that raising MPR could help control inflation, adding however that the “use of monetary policy only to control inflation is stifling the economy and creating more hardship to the people”.
He said: “The increase in interest rates as a result of an increase in MPR is counterproductive, as such increase also increases inflation. Not all fights against inflation require monetary policy remedies, as some of these remedies are outside the control of the CBN.”
Also, Wealth Management and Business Development Consultant, Mr. Ibrahim
Shelleng, said addressing inflation through MPR hike has limited impact on the
former.
He said: “As I have mentioned previously, the drivers of inflation in Nigeria are not due to the excessive money supply, which rate hikes are trying to address.
Inflation in Nigeria is largely caused by structural issues and cost-push factors such as an increase in petrol prices, Naira devaluation, a hike in electricity tariffs, and other increased costs of production. Ask the average man on the street whether inflation has come down, and I’m sure the answer will be negative.”
Impact on Credit
Nonetheless, while the central bank is not in denial that higher interest rates hurt
the economy, it believes at the moment, an upwards adjustment albeit moderately was critical towards maintain a positive balance between fighting inflation and growing the economy.
Asked whether the CBN would consider holding back on further increase, he said,
“I will not give anybody assurance that we are not going to do what we are doing because we are seeing the results of what we are doing.
“We have also seen the impact of MPR hikes on the headline inflation and because we increased rates aggressively, you could see upwards and downward pressures credit. We could see that ultimately that the level of credit has dropped at MPR of 18 per cent, credit had dropped to about 600.”
Emefiele said: “At some point, if you look at it around March or May 2022, credit was about N1.4 trillion but as we speak today, credit is slightly above N600 billion.
“The ultimate object, which is to say, if you raise rates, you are trying to constrain credit; we would say yes, we have seen it happen and I must confess here that we
are not happy that the hike in rates is constraining credit but we have to do our work because inflation is at the heart of what we say we want to deal with.”
Emefiele pointed out that failure to raise rates in order to constrain credit, would
further create more inflationary pressures and “create more problems for us”.
He explained that the MPR hike may no doubt have an impact on growth “but we still feel that at 22.22 per cent, growth is being impacted and that we are not saying that we are removing our eyes from growt.”
The apex bank boss stressed that “In fact, your monetary policy decision would be seen to be not in tandem with macroeconomic policy-making process if at a time when you are seeing an aggressive rise in the inflation rate, what you are doing is an easing policy; it can’t work.”
He added, “We have tried as much as possible to convince ourselves that the decisions we have taken by aggressively raising rates is yielding results, there’s a lag factor involved but we believe that ultimately, we will get to a point where we will begin to see in absolute numbers the inflation rates beginning to drop.”
