MPC may consider interest rate hike pause as inflation eases

With inflation slowing to 32.15 per cent in August, there are indications that the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (MPC), which meets today and tomorrow, will halt further interest rate hike.

While the rate is still far above what it was in August 2023 when it stood at 25.8 per cent, further tightening may no longer appeal to the monetary authority, analysts have suggested.

At its 296th meeting in July 2024, the MPC raised the interest rate by 50 basis points to 26.75 per cent from 26.25 per cent. Another reason the MPC will likely hold the rate is that the prices of basic food items are beginning to recede following the harvest season.

The MPC at its last meeting in July cited the effect of rising prices on households and businesses and expressed its resolve to take necessary measures to bring inflation under control.

The committee noted the persistence of food inflation, which continues to undermine price stability. It noted that while monetary policy has been moderating aggregate demand, rising food and energy costs continue to exert upward pressure on price development.

The CBN governor, Yemi Cardoso, had indicated that the next meeting may not increase the rate. In his note, Cardoso said: “Although the pace of growth in domestic inflation has slowed significantly compared with where we were at the beginning of the year, the modest rise in month-on-month headline inflation to 2.31 per cent in June 2024 from 2.14 per cent in May was a source of concern to the MPC. This suggests that inflationary pressures have not abated despite successive tightening of monetary policy in the last three meetings.”

This statement coupled with happenings within the economy supports the need for the MPC to at least hold the rate because reducing the rate at this time may be premature.

A financial analyst, Umar Abubakar, said the MPC is taking place when the economy is facing challenges such as high food and energy costs.

“The MPC meeting is crucial, especially with the current challenges facing us. Prices of food and energy continue to rise, putting pressure on citizens, while salaries remain stagnant. Minimum wage is yet to be implemented, adding to the struggles of the masses, we hope that with the report of salaries and wages commission, they can fast track the implementation,” he stated.

He maintained that the MPC has limited options to address the economic issues, saying: “The MPC may consider adjusting interest rates upward to curb inflation. But this could further worsen the borrowing landscape for businesses. Easing monetary policy could stimulate economic growth, but it may also fuel up inflationary pressures.”

Abubakar stressed the need for the monetary authorities to work with the fiscal authorities to address the root causes of inflation and economic stagnation.

According to him, the finance ministry needs to do more as steps that have been taken so far have yielded little. He observed that the ongoing rise in food and energy prices will continue to impact Nigerians’ cost of living drastically.

To him, the choice before the MPC is either to maintain the status quo or increase the rate by another 50 basis points. He called for a balanced approach to tackling inflation while avoiding pushing more Nigerians into poverty. He added: “Unless we have seen a balanced approach from the fiscal authorities that addresses inflation, stimulates growth, and supports vulnerable populations, it will be difficult for us to be optimistic at this trying time.”

On his part, an economist, Kelvin Emmanuel, observed that the recent increment in the pump price of PMS may induce another hike in inflation.
“I do not think the slowdown in the inflation rate will be sustained given the 38 per cent increase in the recommended retail price of PMS.”
Indeed, the persistent hiking of the interest rates has been criticised by experts who insisted that increasing the rates will have minimal effect on inflation as the major drivers are more fiscal pressures than monetary.

A professor of capital markets, Uche Uwaleke, said that the easing in the headline inflation rate is due chiefly to the moderation in food inflation occasioned by the harvest season.

“While we celebrate the slowing of inflation, the core inflation rate increased in August. What these points to is that it is time for the CBN to recognise the real pressure points and shift some attention to how the fiscal authorities can be supported to boost food production beginning with a halt in MPR hike this month,” he said. On his part, the Lead Director of the Centre for Social Justice (CSJ), Eze Onyekpere, said further tightening is not the answer.

“The CBN should begin lowering the monetary policy rate to ease access to credit so that the productive sector can grow, and unemployment will decrease,” he said.

A professor of accounting and financial development at Lead City University, Godwin Oyedokun said lowering interest rates can stimulate economic activity and increase demand for goods and services, potentially leading to higher prices.

“However, it can also help to reduce borrowing costs for businesses and consumers, which could alleviate some inflationary pressures. The CBN should carefully weigh the potential benefits and risks of lowering interest rates and consider other factors, such as the state of the economy and the inflation outlook. It is important to maintain a comprehensive approach to addressing the underlying causes of inflation in Nigeria. This includes addressing structural issues, managing monetary policy effectively, and implementing policies that promote economic growth and development,” he explained.