CBN backtracks, takes radical stance against rising inflation

• Raises interest rate by 1.5%
• Decision will worsen already-tight lending space, says Yusuf
• High-interest rate will attract portfolio investors, says Ozo-Eson

The rate-fixing arm of the Central Bank of Nigeria (CBN) backtracked on its position on the country’s rising inflation, yesterday, increasing the monetary policy rate by 1.5 per cent or 150 basis points (bps), an extreme radical stance against rising prices.

A 150bps increase in MPR is a rare decision, perhaps not taken by the Monetary Policy Committee in recent years. With the decision, CBN is compelled to jump on the bandwagon of hawks as speculated by a recent report by The Guardian.

The United States Federal Reserve System had recently increased its benchmark interest rate by 50bps, a decision it had not taken in over two decades, to check inflation at check.

The Bank of England, the Reserve Bank of India and several other central banks have also adopted the contractionary monetary option to deal with inflationary pressure.

African countries such as South Africa, Egypt, Ghana and many others have followed the hawkish wave. Ghana had opted for what many have seen as an extremely radical position, increasing its interest by 200bps to 19 per cent in the week, two months after it similarly raised the rate by 250bps.

The CBN’s ‘bold’ decision came at a time when economists across the world raised a red flag on a possible recession with utmost certainty that European countries’ economies will not escape a slump.

In its communiqué yesterday, CBN said the MPC members “expressed deep concern about the continued uptrend of inflationary pressure” and that despite the gradual improvement in output growth, the current rise in inflation could undermine growth and hinder the full recovery of the economy.

“While the 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. The dilemma confronting the Committee at this meeting, therefore, is how best to drive down domestic prices while continuing to support the fragile recovery,” it stated.

At the meeting, six out of the 10 members voted for a 150bps increase. Other key parameters – asymmetric corridor, cash reserve retain (CRR) and liquidity ratio (LR) – were left unchanged at the asymmetric corridor of +100/-700bps around MPR, 27.5 per cent and 30 per cent respectively.

With local production capacity still very low leading to over-dependence on imported items (which the CBN has regularly admitted) coupled with consistently-weakening naira, it is not yet clear how constrained liquidity would ease inflation, which hit 16.8 per cent last month.

An increase in benchmark increase rate tentatively implies a higher cost of funds to both individuals and businesses, which are already struggling with an excruciating funding environment. It also suggests that the government will pay more to borrow from the domestic market.

The Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Dr. Muda Yusuf, in his immediate reaction, 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.”

Yusuf also balked at the possibility of reducing the inflationary pressure with a mere hike in interest rate when “bank lending has been constrained by the high CRR (many operators in the sector claim that effective CRR is as high as 50 per cent or more for many banks).”

He added that the 65 per cent loan to deposit ratio (LDR) and LR of 30 per cent make lending already too tight.

Nigeria’s commercial loans are among the costliest with borrowers paying around 24 per cent besides a few other charges. Experts said the lending environment would need to be liberalised to give manufacturers a reasonable headroom.

The immediate past General Secretary of the Nigeria Labour Congress (NLC), Dr Peter Ozo-Eson, said the hike in interest rate by the CBN will attract portfolio investors and encourage savings.

He added that the rising inflation rate necessitated the upward adjustment of the interest rate.

His words: “The problem is that we have been having high inflation in recent times. We have rising inflation and under such a situation, it is technically inadvisable to maintain the interest rate at a given level. This is because that rate guides other rates. If we are seeking to mobilise savings, which can be used for investment purposes, we cannot get it done using a rate that is lower than the inflation rate because that will not be attractive for people to save their money.

“Given the direction of inflation and the persistence of its increase in recent times along with other variables in the global space, the interest rate ultimately was bound to go up. The reality of economic pressure dictates what direction that decision will be. I think that going up at this particular time given the general economic situation, particularly inflation, was the right thing to do.”