How CBN new rates will reduce, induce inflation, by experts

The rates decisions reached at the Monetary Policy Committee (MPC) meetings last week have continued to generate mixed reactions among financial experts and market operators.

While some are seeing the decisions as the beginning of another effort towards reversing economic challenges and losses, others are of the opinion that the four-month monetary easing programme should not have been started at all.

The Central Bank of Nigeria had in November 2015, reduced the nation’s benchmark interest rate also known as Monetary Policy Rate to 11 per cent from 13 per cent.

It also reduced the Cash Reserve Requirement for banks to 20 per cent from 25 per cent, while the asymmetric corridor was pegged at +200/-700 basis points, all of which points to increased money in circulation.

However, last week, CBN’s policy making arm- MPC, reversed trend indices, with MPR at 12 per cent; CRR, 22.5 per cent; and asymmetric corridor put at +200/-500 basis points, in an effort to mop up excess money in circulation.

Already, the interbank lending rates rose to 20 per cent before the close of market for the Easter holiday, as the enforcement of the new rates sterilised N409.7 billion from the banking system.

The President and Chief Executive Officer of Time Economics Limited, Dr. Ogho Okiti, said the MPC’s decision to fight inflation was because it has more control on the tools to do so and that it had no other policy option but to combat inflation.

Okiti also noted the effort of the committee to make compensation for negative returns on yields given rising inflation, as it raised the benchmark rate by one per cent, which effectively bring real rates of returns to a positive territory.

“This is expected to have positive implications for portfolio flows. As a result, we expect re-pricing of yields in the bonds market in the weeks ahead. The committee’s decision to narrow the asymmetric MPR corridor is geared towards encouraging banks to deposit excess funds with the CBN,” he said.

The Associate Research at Eczellon Capital Limited, Mustapha Suberu,
Said with the action of the MPC, there is going to be an increase in money market rates on the back of the squeeze in banking system liquidity, which would translate to a higher cost of funds for financial institutions and further pressure net interest margin

“Of course, increased cost of fund implies a possible rise in the cost of credit in the economy for borrowers. This does not particularly augur well for the Industrial sector of the Nigerian economy, which is already in recession

“Also, a 100 basis point hike in MPR translates to a rise in nominal Savings interest rate to 3.6 per cent from 3.3 per cent. This however remains unattractive given current inflation rate of 11.4 per cent, which implies real returns of -7.8 per cent on Savings account

“The succor the economy is likely to witness in the short term would be stability in the value of the naira especially at the parallel market as reduced naira liquidity would likely cushion demand for the dollar,” he said.

But the Head of Investment Research at Afrinvest Securities Limited, Ayodeji Eboh, said the move might worsen the structural and cost-push factors as cost of funds now go up.

He also faulted the suggestion that increase in banking system liquidity is fundamentally driving the pressure on exchange rate, as high subscription at CBN interbank auctions continued despite intermittent treasury bills issuance conducted.

Eboh expressed worry that anticipated liquidity impulse from expansionary budget may not allow the desired effect in this tightening policy in the medium term.