By Derrick Bangura

After holding the Monetary Policy Rate (MPR) constant at 11.5 per cent for about two and a half years, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), on Tuesday, raised the benchmark interest rate by 150 basis points to 13 per cent in response to global inflationary pressures, which had continued to hurt economies around the world.

The MPR is the rate at which the apex bank lends to commercial banks and often determines the cost of funds in the economy.
The MPC, however, left other monetary policy parameters, including the apex bank’s Cash Reserve Requirement (CRR) and the Liquidity Ratio (LR), unchanged at 27.5 per cent and 30 per cent, respectively.

Addressing journalists at the end of a two-day meeting of the MPC, CBN Governor, Mr. Godwin Emefiele, who read the committee’s communiqué, admitted that the hike in MPR would increase cost of borrowing, especially in non-priority sectors of the economy.

Emefiele, however added that lending to key priority sectors, which had been identified to boost growth and generate employment, would remain at single-digit interest rate of nine per cent.

The central bank governor pointed out that the decision to raise interest rate was the last resort and a difficult one for the MPC, which had been crafting policies to stimulate economic growth as well as achieve financial stability. He said the CBN had adopted a contractionary monetary policy stance in view of the aggressive rise in inflation in recent times, which had led to high food and commodity prices in the country.

Emefiele noted that CBN’s action was aimed at curbing inflation, on the one hand, and supporting growth of the economy, on the other. He said the MPC was in a dilemma in arriving at a decision to raise the lending rate. As a result, the apex bank governor explained, a drastic measure such as raising the benchmark lending rate was required to reduce monetary expansion in order to tame inflation.

He assured that though inflation was expected to maintain an aggressive acceleration in the coming months, the central bank would not hesitate to return to its accommodative stance whenever it saw a reduction in the headline index.

Emefiele said, “The concerns about the global rise in inflation and price levels; you all would have seen that the price of crude quite unexpectedly has been above $100 per barrel. In fact, Nigeria’s Bonny light yesterday, when we started the meeting, was about $116 per barrel.

“What this means is that the standard pricing indicator; yes, whereas crude prices have gone up per barrel, at the same time the cost of refining and ultimate pump price at the station would naturally have gone up.

“This is a global phenomenon and I was watching the CNN a few days ago and one of the analysts was talking about an incredible distortion to financial markets in the United States, and I said, yes, we are all welcome to a situation where inflation is rising to unprecedented levels in the US and other economies, growth is also coming down.

“And if you must tackle inflation, prices, and at the same time you want growth, then you know that you are faced with some compelling dilemma as to what to do.

“You like to see inflation come down but at the same time you want growth to go up. But to achieve that, you have to take two decisions that are in opposite directions and that brings to bear what type of skills you have put in place to ensure you are able to manage these two in a way that you maintain a balance when you see a moderation in inflation and at the same time you grow your economy.”

He added, “For us in Nigeria, you would have observed that in the last two and a half years, what we have been doing is that we want to pursue a policy of price stability that is conducive to growth and that’s why somehow we have used our development finance intervention facilities, we have actually yielded positive results and helped to drive growth in our economy.

“We’ve used that to drive growth while at the same time we try as much as possible to maintain a hold position while looking at the optimum level of liquidity in the industry to be able to moderate inflation at a level that does not hurt the growth and economy of our country.

“But with what we have seen globally either in the areas of the supply chain, increases in prices of petroleum products, and the rest of them, we have seen aggressive growth in inflation in Nigeria between March and April of 2022.

“And the forecast from our statisticians, including the NBS and CBN as well as our colleagues in research and monetary policy, is that unless something drastic or significant actions are taken, it will be difficult for us to really rein in inflation if we don’t do something immediately.

“This decision has been taken because we felt that there may continue in the next couple of months to be an aggressive acceleration in inflation and we think there is a need to take some drastic actions to reverse it.

“If we are able to see a reversal, perhaps, we can say we are returning to what we can call the normal period, when we are looking at using CRR to moderate inflation and at the same time using our development finance to really push for growth.”

Emefiele said the broad outlook for both the global and domestic economies in the medium-term remained clouded with uncertainties arising from the lingering war between Russia and Ukraine, the unfolding impact of the extensive sanctions imposed by several countries on Russia, and the downside risks from the continued spread of the COVID-19 pandemic.

He added that global growth was confronted with significant headwinds, which might derail the current projection further, adding that the continuing rise in inflation is also set to undermine the recovery of output growth due to the associated build-up of uncertainties around the cost of inventory and other production inputs.

The CBN governor said the rise in global debt was also an unfolding dilemma, which policymakers must carefully evaluate and address to avert a near-term global financial crisis.

In summary, he said, while global aggregate demand remained strong and growing, the numerous supply-side constraints would continue to undermine the recovery effort, at least in the short to medium term.

In the domestic economy, the CBN governor noted that data on key macroeconomic variables indicated that the recovery of output growth will continue, probably at a more subdued pace, considering the unfolding domestic and external shocks to the economy.

He said domestic price development was, however, expected to maintain an upward pressure in light of the build-up of spending related to the 2023 general election.

The MPC noted the risks confronting the global economy involved not only inflation and prices, but also included risks associated with weakening growth prospects across the world.

The committee observed that whereas post-pandemic policy support remained broadly expansionary, at least, from a fiscal standpoint, the sharp rise in inflation across both the advanced and emerging markets economies had generated growing concern among central banks, as the progressive rise in inflation, driven by rising aggregate demand and wage growth, was putting unsustainable upward pressure on price levels.

Consequently, Emefiele said, major central banks, such as the US Fed, Bank of England, European Central Bank, and Bank of Canada, had provided strong guidance for a progressive shift away from monetary policy accommodation to drive market interest rate upward, which may ultimately impact capital flow away from Emerging Market Economies.

He said, “On another hand, MPC noted that the war between Russia and Ukraine has resulted in significant disruption of the global supply chain, at a time when the global economy is still confronted with downside risks to growth associated with the COVID-19 pandemic. In addition to this, global trade has been impacted by the series of restrictions imposed by NATO countries and its allies against trade with Russia.

“This has increasingly fragmented the global economy, imposing huge strains on the tepid post-pandemic recovery. Only recently, China, the USA, and South Africa are seeing a renewed spike in COVID-19 infections.

“As a result, the Chinese government recently re-introduced lockdown in major industrial cities, to forestall the spread of the pandemic, further disrupting the supply chain crisis. In the view of the MPC, these two risks pose great challenges to rising inflation globally.”

Among other things, the CBN governor said on the decision on whether to hold, tighten or loosen, the MPC felt that loosening in the face of the rising policy rates in advanced economies might result in a sharp rise in capital outflow and faster dry-up of foreign credit lines.

Emefiele stated, “MPC also feels that loosening could lead to further liquidity surfeit and inflationary pressure. So as to whether to hold, MPC feels its stance would strengthen the perception that the CBN has abandoned its primary mandate of taming inflation.

“On the need to tighten, MPC feels that tightening would help moderate the inflationary trade-off from the steady growth recovery so far. MPC also feels that tightening would help rein in inflation before it assumes a galloping trend, considering the progressive increase in headline inflation (m-o-m), particularly with the sharp 90 basis point increase in April 2022.”

Emefiele added, “Furthermore, MPC feels that tightening would narrow the negative real interest rate margin, improve market sentiment, and restore investor confidence.

“Equally, members believe tightening would moderate inflationary pressure pass-through to exchange rate depreciation and moderate the speed of capital flow reversal, provide incentives for foreign capital inflows, and sustain remittances.

“Lastly, tightening could moderate government domestic borrowing, as government debt servicing to revenue ratio increased significantly in recent times, threatening debt sustainability.”

He said MPC members expressed deep concern about the continued uptrend of inflationary pressure, despite the gradual improvement in output growth.

Emefiele said, “The committee noted that the current rise in inflation may be inimical to growth and, thus, 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.”

According to him, “After carefully reviewing the developments of the last two months and the outlook for both the domestic and global economies, as well as the benefits and downsides of each policy option, the committee decided to raise the Monetary Policy Rate (MPR) to rein in the current rise in inflation, as members were of the view that the continued uptrend would adversely affect growth.”

Analysts React to MPR Hike

Commenting on the MPR adjustment by the CBN, Investment Analyst, Ayodeji Ebo, noted that the rate hike came as a surprise considering the magnitude and a major drift from the previous stance of the CBN. According to him, raising MPR will not necessarily translate to increased foreign portfolio investments due to the foreign exchange challenges.

Ebo told THISDAY, “This will lead to the high cost of borrowing for firms and the government. As a result, lead to a higher cost of production and a higher inflation rate. This will make the stock market less attractive, leading to a downtrend. Also, the fixed income market will be bearish in the interim, as traders try to minimise losses on their portfolios.”

Founder and Chief Executive of Centre for the Promotion of Private Enterprise (CPPE), an economic and business advocacy think tank, Dr. Muda Yusuf, explained that while the hike in MPR by 150 basis points to 13 per cent by the MPC was understandable, “whether this would significantly impact on the inflation is a different matter.”

Yusuf said, “Already, 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), the discretionary debits by the apex bank, the 65 per cent Loan to Deposit Ratio (LDR) and liquidity ratio of 30 per cent. The lending situation in the economy is already very tight.

“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 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.”

Yusuf added, “The transmission effects of monetary policy on the economy are, therefore, still very weak. In the Nigerian context, price levels are not interest-sensitive. Supply-side issues are much more profound drivers of inflation. 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.”

Head, Financial Institutions Ratings at Agusto & Co, Mr. Ayokunle Olubunmi, said the hike was not surprising, considering the rising inflation as well as the tilting of members of the MPC in favour of a hike in rates in previous meetings.

According to Olubunmi, “If you have been following the communiqué of individual members, you would notice that gradually over the last couple of months, most members have moved from maintaining to an increase. At the last meeting, it was just a narrow decision for them to maintain it.

“It is not surprising and if looked at in the context of what is happening globally, interest rates are rising and one of the major ways the CBN can actually make Nigeria look a bit more competitive is for them to raise rates.

“Globally, inflation rate is also increasing and in Nigeria, while there are other factors that contribute to rising inflation, one of the ways of combating that is to also raise rates.

“Also, with electioneering, there would be a significant increase in money in circulation and one of the ways to try reduce the effect of that transmitting to higher inflation is to actually raise rates.”