New Telegraph

December 3, 2023

MPC: Dissecting pros, cons of interest rate hike

After sticking to a baseline interest rate of 11.5 per cent for an unbroken period of two and half years, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), last week, jecked up the Monetary Policy Rate (MPR) to 13 per cent. It hinged the decision, primarily, on an attempt to rein in rising inflation, a development that drew varied responses from analysts, ABDULWAHAB ISA reports

The world is a global community. The economic strength of a nation depends on the other. In other words, economies are closely knitted. Currently, Ukraine and Russia are locked in war. Although the two countries are miles away from Nigeria and many other nations, but the impact of the war is hurting every nation on the planet earth economically. Energy cost and prices of essential commodities such as wheat, amongst others, have skyrocketed on account of the Ukraine/Russia war. Experts are projecting inflation will continue to rise across advanced economies, at least in the medium term. They cited tightening supply amidst closure of major trade routes that supply input for food and fertilizer, as well as the high price of energy. Nigeria is not immune to the current spiraling inflation. In the past months, inflation data from the National Bureau of Statistics (NBS) showed consistent rise in both core and food inflation. NBS’ inflation update for April put the figure at 16.82 per cent. In Nigeria, food items and energy prices have been on an upward trend. Currently, the country is in an electioneering mood, with political parties and politicians jostling for various political offices in a general election that is still months away. The Central Bank of Nigeria’s bi- monthly Monetary Policy Committee (MPC) meeting held last week. The session presided by the CBN Governor, Mr. Godwin Emefiele, dissected both domestic and global headwinds in arriving at the Monetary Policy Rate (MPR). MPR is the baseline interest rate in an economy. It is the CBN’s lending benchmark to commercial banks. At Tuesday MPC’s meeting, the committee jacked up interest rate to 13 per cent, raising MPR by 150 basis points from 11.5 per cent, a rate MPC had consistently upheld unchanged in the last two and half years. The decision didn’t affect other rates parameters. MPC retained MPR around an asymmetric corridor of +100/-700 basis points, retained Cash Reserve Ratio (CRR) at 27.5 per cent and liquidity ratio at 30 per cent.

Taming spiral inflation ahead of election

MPC members, according to the CBN governor, expressed concern about rising inflation, which, if drastic steps are not taken, may erase modest growth recorded in the economy. “Members expressed deep concern about the continued uptrend of inflationary pressure, despite the gradual improvement in output growth. The Committee noted that the current rise in inflation may be inimical to growth and thus hinder the full recovery of the economy. While MPC identified several supply-side factors, which may be contributing to inflationary pressure, emerging evidence shows that money demand pressure is on the rise and is unlikely to abate until the 2023 general elections are concluded.”

Interest rate hike

as delicate option The decision to increase CBN’s lending rate to 13 per cent from the previous constant position of 11.5 per cent wasn’t an easy one. CBN Governor, Mr Godwin Emefiele, admitted in his address after the MPC plenary session. According to him, the dilemma confronting the Committee at the meeting was how best to drive down domestic prices, while continuing to support the fragile recovery. “In the current circumstance, the committee was of the view that it was confronted with the choice of either to hold all policy parameters constant to allow previous policy measures to continue to support growth or tighten the stance of policy to curb money demand growth and upward movement of domestic prices. A loosening option would likely result in an increased liquidity surfeit, rise in inflationary pressure, and further pressure on the exchange rate.” The choice of holding, in the view of members, would not only continue to support growth, even though moderately, but will also allow the growth of money demand to continue at the current pace, leading to the uptick in inflationary pressure. While growth concerns remain paramount to the committee, he said, MPC members were of the view that persistent uptick in domestic price levels was clearly a downside risk to growth that must be addressed urgently.” The CBN governor noted that while it may seem contradictory to raise rates in the face of fragile growth, it was a dilemma most central banks around the world were grappling with at the moment. “Yet, on balance, it is quite clear and compelling that tackling inflation is more urgent in the sequence of policy objectives”, he said, adding that, after careful analysis of prevailing circumstances at local and global economies, MPC was left with no choice than to raise the Monetary Policy Rate (MPR) to rein current rise in inflation.

Experts’ reactions

Given MPC’s reverse decision, which approved a hike in the interest rate, experts and informed analysts assumed varied positions. They spoke against the backdrop of how the CBN’s decision may affect business, its implications on economy and business portfolios. Political economist, Aliyu Ilias, said the MPC decision was informed by trends in the global economy where most developed nations are contending with rising inflation. “Inflation is about 16 .8 per cent in Nigeria, a challenging and troubling figure. However, the need for interest rates to be increased is to tame and lessen effects of inflation. What are the things causing inflation? The major one being food inflation. You can see the cost of even bread has risen, including the cost of fuel, which is also on the increase. Even at the global level, the U.S. is trying to tame inflation. To control Nigeria’s inflation is a good thing, but increasing the lending rate now means there will be less borrowing. People won’t want to borrow and this will affect manufacturers of goods. This is not good for the economy. At this point, the purchasing power isn’t getting better and you are increasing the lending rate. It simply means the economy will go downward,” he said. Asked what should have been done by MPC, he said: “For me, there should be another fiscal policy that ought to be applied. Resorting to an increase in interest rate isn’t the best now. If you look at the pattern of voting at MPC, it’s six against five, which is not a good one. I think they should have waited a while and see how things would pan out before hiking interest rates. Food inflation is about 16.8 per cent. Increased interest rates could aggravate the unemployment situation.” In his view, financial adviser/ wealth creation expert, Gabriel Idakolo, described hiking of interest rate by CBN as an ill-timed decision. “Hike in interest rates by CBN is ill-timed at this period that inflation is on the rise. There is continuous devaluation of naira against major currencies, low productivity by the manufacturing sector due to security and economic challenges and, above all, political uncertainties due to next year’s elections. Increasing the rate now will further hurt the economy. “The banks, based on this new increase, will definitely raise pricing on both new and existing loans, which will definitely affect their customers and the profitability of their businesses. This will also affect the cost of doing business in Nigeria,” Idakolo reasoned. Ibrahim Shelleng. MD, Credent Investment Managers Ltd, said move by CBN was in line with the response from numerous countries in the light of increasing global inflation “The apex bank has taken the hawkish stance to reduce the impact of inflation. Although this will undoubtedly slow down growth as was witnessed in Q1 2022. It is also a step in the right direction in the short term, given global uncertainties. “The increased MPR is also a ploy to attract foreign portfolio inflow amidst the FX illiquidity plaguing the country. “However, there will undoubtedly be an effect on business growth as lending rates increase. This will slow down the post- COVID growth the country has witnessed,” he said.

Last line

The decision by MPC to hike interest rate to 13 per cent is a tough one, given that it will lead to an increase in the cost of borrowing by businesses. However, to leave inflation jerking up unchecked will, in turn, affect economic growth.

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