Despite the relative decline in inflation in July and August, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), last week, raised the Monetary Policy Rate (MPR), the benchmark interest rate by 50 basis points to 27.25 per cent from 26.75 per cent in response to the high inflation rate. But experts are expressing concerns over the effectiveness of the tool, saying it’s failing to address the root causes of Nigeria’s inflationary trends. PAUL OGBUOKIRI reports
MPC resolved to further tighten policy
Last week, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria(CBN) for the fifth time this year, voted to increase the monetary policy rate, which measures the benchmark interest rate, to 27.25 per cent. The Central Bank Governor, Olayemi Cardoso, made the disclosure at the 297th meeting of the bank. According to Cardoso, the bank’s MPC members unanimously agreed to raise the MPR by 50 basis points to raise the benchmark interest rate from 26.25 per cent to 27.25 per cent. The bank retained the asymmetric corridor around the MPR to +500/-100 basis points. The committee also raised the cash reserve ratio of deposit money banks by 500 basis points to 50 per cent from 45 per cent and merchant banks by 200 basis points to 16 per cent from 14 per cent. At the July meeting, the bank raised the MPR by 50 basis points to 26.75 per cent from 26.25 per cent and adjusted the asymmetric corridor around the MPR to +500/-100 from +100/-300 basis points. “The committee was unanimous in its decision to further tighten policy,” Cardoso explained. Cardoso said that the committee noted the moderation in headline inflation in July and August and the stability in the foreign exchange market. He said the committee, “unanimously recognized that a lot more is required to actualize the bank’s price stability mandate.” Cardoso said inflation remained concerning to members of the MPC, adding that there was a need to address an upward trend of energy prices. But financial economist and Director at the Institute of Capital Market Studies, Nasarawa State University, Professor Uche Uwaleke, had warned against further MPR hike as it was stiffing investments. “Given the easing inflation in July and August, the MPC should completely pause rate hikes,” Uwaleke said. Reacting to the decision, Managing Director of Arthur Steven Asset Management Limited and former President of the Chartered Institute of Stockbrokers (CIS), Mr. Olatunde Amolegbe, stated that the move appeared inevitable given the CBN’s struggle to meet its inflation target of 21.5 per cent. Amolegbe pointed out that the recent increase in fuel prices was likely to worsen inflationary pressures, making it necessary for the Monetary Policy Committee (MPC) to take preemptive action. “The MPC seems to be acting proactively to address the potential rise in inflation due to higher fuel costs,” he noted. However, Treasury Manager, Daniel Akeju, said that the challenges facing the Nigerian economy required more than the simplistic approach of raising the MPR. Akeju, who is a member of the Chartered Institute of Treasury Management (CITM), noted that while controlling inflation was crucial, it must be done in tandem with measures that will address the root causes of the economic instability. He said a balanced, holistic strategy that would combine supply-side interventions, enhanced security, economic diversification, and social safety nets would be more effective.
Economy has shown sign of growth
Analyst and Head of Research at FSL Securities Limited, Mr. Victor Chiazor, expressed surprise at the recent decision by the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) to raise the Monetary Policy Rate (MPR) by 50 basis points, given the economic indicators observed before the meeting. Chiazor noted that before the MPC meeting, the Nigerian economy had shown sigof improvement. These included two consecutive months of declining headline inflation, steady growth in foreign exchange reserves, relative stability in the exchange rate, and a slowing down of interest rates, evidenced by the treasury bill stop rate dropping to 18.59 per cent in the last auction. “These developments, along with other economic activities, suggested that we may have reached the end of aggressive inflationary pressure,” he said. Chiazor added that it was expected that the CBN would begin adjusting its monetary policy to support economic recovery. While a policy shift was not anticipated immediately, the general expectation was for the MPC to maintain its current stance until the next meeting, allowing time to assess the economy’s response to the recent increase in the pump price of Premium Motor Spirit (PMS). However, the CBN’s decision to raise the MPR is likely to have significant implications for the economy, particularly in terms of lending rates. “This move is expected to increase the cost of borrowing, placing additional strain on businesses that are dependent on loans, and potentially making it difficult for the private sector to raise capital,” Chiazor explained. Chiazor further noted that this decision could harm the performance of companies listed on the Nigerian Exchange. “Profit margins for many companies are expected to be squeezed, as the higher cost of capital could lead to reduced profitability,” he said.
CBN should domestic production-centric-MAN
The Manufacturers Association of Nigeria (MAN), urged the Central Bank to consider conducting a comprehensive review of the effects of continuous rate hikes on inflation and the real sector over the past five years to guide future decisions. The association, therefore, said it was expedient that the CBN prioritised the survival of manufacturing in making monetary policy decisions. “This would enable the sector to effectively play its role as the key driver of employment creation, productivity, stable foreign exchange earnings, and sustained economic growth,” the association added. MAN urged CBN to be domestic production-centric by taking a detour from a continuous hike in MPR and allow time for the real sector to recover from the impact of previous hikes. MAN’s Director General, Segun AjayiKadir, explained in a statement, that the continued increase in interest rates, which now totals 15.75 percentage points since May 2022, would compound the challenges faced by the sector, including rising production costs in the face of declining consumer purchasing power. “With the increase in borrowing costs, manufacturers will now pay over 35 per cent on their credit facilities. Clearly, this will lead to an increase in production costs, higher prices of finished goods, lower competitiveness and production capacity expansion,” he said. He noted that the impact of higher interest rates goes beyond compounding the challenges of manufacturers as it stifles opportunities for investment in crucial areas such as technology, retooling, and expansion within the manufacturing sector. He said manufacturers will, all the more, be compelled to choose servicing existing credit facilities over expansion and investment in new product lines. For instance, he said over the first six months of the year, manufacturers incurred more than N730 billion in capital expenses due to the continuous rise in interest rates imposed by commercial banks. This dilemma, he said, hampers innovation, productivity and growth. “Moreover, the manufacturing sector is grappling with depressed consumer demand, primarily driven by lower purchasing power. This decline has severely hampered capacity utilisation within the sector. “Data from the first half of the economic review published by the Manufacturers Association of Nigeria reveals a troubling trend- the value of unsold finished goods inventory surged by 42.93 percentage points, reaching N1.24 trillion compared to N869.37 billion at the close of 2023,” he added. He further explained that this growing stockpile of unsold products underscored the difficulties manufacturers face in a weakening market.
Improving agriculture, stabilizing energy prices can help reduce inflation-LCCI
Also speaking, the Director General of LCCI, Dr. Chinyere Almona, called on the Central Bank to diversify its approach to controlling inflation beyond interest rate hikes in favour of policies that directly address supply-side constraints, such as improving agricultural productivity and stabilising energy prices. She said those can help reduce inflationary pressures more effectively. Almona said: “The LCCI acknowledges the CBN’s efforts to control inflation and stabilise the economy. However, we are deeply concerned about the broader implications of this rate hike on the business community and the overall economic landscape. “The LCCI urges the government and the CBN to consider a more balanced approach to monetary policy. While controlling inflation is crucial, mitigating adverse effects on business operations and economic growth is imperative.” She added: “Increased investment in infrastructure can alleviate production bottlenecks and reduce business costs. This will enhance productivity and competitiveness, helping to tame inflation from the supply side.’’ The LCCI said that it remained committed to working with the government and the CBN to ensure policies that foster a conducive environment for business growth and economic stability. “A holistic approach, balancing inflation control with support for businesses, will pave the way for sustainable economic development in Nigeria,” it said.
