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First Time In 3 Years, CBN Raises Interest Rate To 13%

The Monetary Policy Committee of the Central Bank of Nigeria (CBN) yesterday, in a historic decision raised lending rate for the first time in about two and half years to 13 per cent. The bank had held the official interest rate at 11.5 per cent to pursue a place of price stability that is conducive to growth.

This is as analysts said, it might not be as helpful at thought to be in curbing rising inflation and would do no good to the economy in terms of making lending affordable.

CBN governor, Mr Godwin Emefiele, said the aim is to tame inflation and maintain output growth. He said the CBN will leave the rate ta the new rate until it’s able to moderate inflation. Emefiele made the announcement yesterday at the end of a 2-day meeting of the MPC in Abuja.

“We have seen an aggressive growth in inflation figure between March and April 2022,” Emefiele said, adding: “We want to see to how we can tame inflation which is our core mandate and at the same time support growth in the other direction so that Nigerians can see prosperity effectively.” The decision of the apex bank to review the official interest rate upward had been projected by experts who point to rising global and domestic inflationary pressure.

However, the MPC retained other policy parameters constant around the MPR. It means that the apex bank held the asymmetric corridor of +100/-700 basis points was also retained, same for the Cash Reserve Ratio at 27.5 per cent, while Liquidity Ratio was also kept at 30 per cent.

Analysts who spoke with LEADERSHIP after the Monetary Policy Committee of the Central Bank of Nigeria announced the hike in benchmark interest rate, said, a rate hike is not enough to entice foreign direct investment or curb the spiralling inflation which is now at 16.82 per cent.

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 into increased foreign portfolio investments due to the foreign exchange challenges.

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

Also, 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 is understandable, “whether this would significantly impact on the inflation is a different matter.

“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. 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.

“The transmission effects of monetary policy on the economy is 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.”

On his part, the 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.

“If you have been following the communique of individual members you 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.”

There has been an aggressive growth in inflation in Nigeria between March and April of 2022. Inflation rate rose to a record 90-basis points growth rate. The forecast from official statisticians both in CBN and the National Bureau of Statistics (NBS) indicate that “unless some drastic or significant actions are taken, it may be difficult for us to really rein in inflation if we don’t do something immediately,” Emefiele said yesterday while justifying the hike in interest rate.

The MPC also based its decisions on events at the global economy. For instance, inflation in the US has hit 8.3 per cent, unprecedented; in the Euro area, inflation hit 7.4 per cent; in UK: 9 per cent, in China, it’s to as high as 2.1 per cent, in India, about 7.79 per cent. These are price levels that are unprecedented in decades. And that is the reason the global economy, particularly Central Banks and monetary authorities globally are thinking that the need for them to confront inflation.

To do that, the CBN governor said “it means that a lot of tough decisions have to be taken.” Nigeria’s economy is directly tied around event at the global market. The war between Ukraine and Russia that has negatively impacted energy prices, while also jacking up food prices and the electioneering spendings in Nigeria and insecurity are some of the factors responsible for the rise in core and food inflation at the domestic market.

Mr Emefiele said the Central Bank was going to continue to deploy its interventionist programme to encourage output growth and ensure that priority sectors of the economy do not suffer injuries from the hike in the lending rate.

Acknowledging that the hike in MPR will push cost of funds and drive down lending to the manufacturing industry, especially the non-priority sectors, Mr Emefiele said MPC has told CBN management to continue its development finance activities at single digit interest rate for 10 years loan with two years moratorium.

Meanwhile, the CBN governor has also denied that Nigeria was exited from rating agency JP Morgan’s bond Index, saying Nigeria is still in the index. “Nigeria’s rating was only reclassified. It’s a mere reclassification of our size in the index. It is akin to a rating agency changing your rating from positive to stable. This is basically what’s happening. I repeat, Nigeria has not been deleted from JP Morgan bond index,” he stated.

He said JP Morgan merely felt that Nigeria has been left as an overweight country because they felt as an oil producing country, there ought to be increase in accretion to its reserve in the midst of an increase in crude prices. “And seeing that this is not happening, that is the reason Nigeria rate has been brought from overweigh to market weight,” he stated.

Nigeria, Not Credit-driven Economy— Yusuf

The chief executive officer of Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf said, the Nigerian economy is not a credit driven economy.

In developed countries which operate credit economy, he said, they have much higher levels of financial inclusion, robust consumer credit framework and strong correlation between interest rate and aggregate demand.

He made this known in his statement on the May 2022, MPC Communique.

According to Yusuf, the outcome of the MPC meeting yesterday was not unexpected having regard to the intense inflationary pressures, the increasing risks to price stability and the policy tightening trend by Central Banks globally.

He explained that “the hike in MPR by 150 basis points to 13 per cent by the MPC is understandable. But whether this would significantly impact on the inflation is a different matter. Already, bank lending has been constrained by the high CRR, the discretionary debits by the apex bank, the 65 per cent Loan to Deposit Ratio (LDR) and liquidity ratio of 30 per cent. Lending situation in the economy is already very tight.”

He noted that, “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.

“The transmission effect of monetary policy on the economy is 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, while there will be some adverse effects on the equities market.”

In curbing inflation, CPPE CEO said, government need to address the security concerns causing disruption to agricultural activities; reform the foreign exchange market to stabilise the exchange rate, reduce volatility and stimulate forex inflows; address forex liquidity issues through appropriate policy measures; fix the structural problems to boost productivity and competitiveness of domestic firms; address the challenge of high transportation and logistics cost; reduce fiscal deficit monetisation to minimise incidence of high-powered money in the economy; among others.

He also emphasised on the need for government to address concerns around high energy cost and create an investment friendly tax environment to boost investments and output in the economy.

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