MPC to sustain monetary tightening, increases interest rate

•Inflationary pressure to continue, experts predict

The Monetary Policy Committee (MPC), yesterday, increased the benchmark interest rate by 100 basis points (bps), from 13 to 14 per cent, confirming its determination to continue with an aggressive monetary tightening should the inflation rate continue to rise.

It is the second time the Committee, the rate-fixing arm of the Central Bank of Nigeria (CBN), would increase the lending rate in two months and the third in over two and half years.

Even with the review, the monetary interest rate (MPR) is still 460 bps higher than the inflation rate, which rose by over 80 bps to 18.6 per cent in June.

MPR determines the commercial lending rate of the economy but some economists baulk at the efficiency of the transmission, arguing that the financial system still has a long way to go before the benchmark becomes relevant.

Chairman of the Committee and Governor of the apex bank, Godwin Emefiele, said six out of the 11 members that attended the two-day meeting voted to sustain the decision. MPR also retained the asymmetric corridor at +100 and -700 bps around the MPR; kept the cash reserve ratio (CRR) and liquidity ratio at 27.5 and 30 per cent respectively.

At a media briefing on the outcome of the meeting, Emefiele said the Committee would not “promise that it will not continue to increase the interest rate” if inflation continues to surge in a manner that would retard growth.

The CBN boss said the MPC was concerned about the continuous rise in the inflation rate despite the previous interest rate review. He, however, observed that inflation concern was not peculiar to Nigeria.

Emefiele said the country’s inflation is driven by both demand and supply factors with the apex bank responding to the former with relevant monetary tools. He added that its interventions across different sectors of the economy have contributed immensely to reducing pressure from the supply side.

According to him, elevated inflation is a threat to economic growth. Though he was confident output, which was 3.1 per cent in the first quarter, would continue on the growth trajectory, he warned that the global aggressive monetary normalisation, the war in Europe and COVID-19 are major threats to growth.

While the CBN said it would match continual inflationary pressure with interest rate adjustment, experts suggest that with massive election spending ahead, rising energy costs and other supply challenges, inflation would remain uptick in the coming months.

With inefficient power identified as the first hurdle to cross to power the industrial sectors, the Chief Executive Officer of Dairy Hills Limited, Kelvin Ayebaefie Emmanuel, said it is time to take action.

“There is a captive energy policy of the Nigerian Electricity Regulatory Commission (NERC) empowering the private sector to set up power plants and mini-grids that are not more than 10 megawatts to supply power to certain sectors of the economy. If that law is passed across the 36 states of the country including Abuja, governors will be empowered to open bids to private companies to set up independent power plants and mini-grids to provide power to companies,” he said.

He also called on the CBN to recover its overdraft to the Federal Government, which is estimated at N19 trillion.

His words: “Another way to curb inflation is for the CBN to recoup the advances it gave the Federal Government, which is above the five per cent as stipulated in the CBN Act 2007 to reduce the cash supply in the economy. It should also end the quantitative easing programme it is running. This is the last policy tool the CBN has in terms of monetary policy to fight inflation.”

He stressed the need for the CBN to work with the fiscal authority to implement backward integration of key sectors so that Nigeria can reduce its import bills.

“Nigeria must create value for the export it is doing currently, especially in shear butter, millet, cassava and ginger among other agricultural produce it exports,” he noted.

Emmanuel, who lauded the CBN intervention in the growth of rice in Nigeria, observed that there are three to four million tonnes of paddy for millers in Nigeria to stop the importation of rice.

On his part, Fiscal Policy Partner and Africa Tax Leader, PwC, Taiwo Oyedele said monetary tools alone could not address the current inflation.

Oyedele said the government needs to adopt a combination of complementary policy measures to address the soaring inflation rate in the country rather than relying majorly on raising the monetary policy rate.

He noted that since the key drivers of inflation include the rising prices of food items, higher energy costs in addition to scarcity experienced in some parts of the country with the attendant impact on transportation costs, there is a need to address the inefficiency in the energy supply value chain, limit reliance on CBN overdraft and suspend recently introduced taxes on certain goods such as the excise duty on non-alcoholic beverages.

Dr. Muda Yusuf, an economist and former Director General of the Lagos Chamber of Commerce and Industry (LCCI), said the rate hike “ was unexpected, but not desirable”.

“Although the decision was in line with the policy tightening trend by Central Banks globally, it failed to reckon with domestic peculiarities. The key drivers of Nigeria’s inflation are supply-side variables, not demand driven. The previous hike in the policy rate of 150 bps in May did not have any significant impact on the inflation numbers. If anything, the general price level became even more elevated.

“We recognise that the primary mandate of the CBN is price stability, but numerous headwinds have posed significant risks to this critical objective. Some of these include the surge in commodity prices and impact on energy cost, disruptive effects of insecurity on agricultural output, and global supply chain disruptions. The hike in MPR would not change these variables,” the economist said.

He noted that the lending environment was already too tight for commercial banks as many claim the effective CRR is as high as 50 per cent owing to “the discretionary debts by the apex bank”.

The Nigerian economy is not a credit-driven economy, unlike what obtains in many advanced economies, which have much higher levels of financial inclusion, robust consumer credit framework and a strong correlation between interest rate and aggregate demand. The level of financial inclusion in the Nigerian economy is still quite low, access to credit by households and MSMEs is still very challenging, and the informal sector accounts for close to 50 per cent of the economy,” he noted.

Many experts had advised the CBN to adopt a more dynamic CRR to enable them to adjust the reserves on a real-time basis in response to a decrease or increase in the amount of despite held by individual banks.

Like others, Yusuf also noted that the transmission effects of monetary policy on the economy are therefore still very weak, he noted that price levels are not interest rate sensitive.

He added: “The new MPR hike means 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. The equities market may be adversely impacted by the hike.”