Business
Experts, CBN on collision course over new MPR
BY EMEKA EJERE
Continued tightening of the monetary policy as a way of taming inflation by the Central Bank of Nigeria (CBN) is eliciting reactions dominated by knocks among those who are in the know about the workings of the economy, with many citing unaddressed inflation drivers.
The apex bank had after the Monetary Policy Committee (MPC) meeting in Abuja on Tuesday raised the Monetary Policy Rate (MPR), which measures interest rate from 16.5 per cent to 17.5 percent, noting that decelerating inflation is not enough to halt interest rates just yet.
Specifically, the MPC raised the monetary policy rate by 100 basis points to 17.5 per cent and kept the asymmetric corridor at +100/-700 basis points around the MPR. The Committee retained Cash Reserve Ratio (CRR) by 32.5 per cent while liquidity ratio was kept at 30 per cent.
This is the first interest rate hike in 2023 and it suggests that the apex bank is continuing with the hawkish rate policy started in 2022. Recall that the CBN had raised interest rates by a cumulative 500 basis points last year in a bid to tame the rising inflation rate in the country.
The decision to further tighten the monetary policy rate was made despite the moderation of the headline inflation rate in December 2022 to 21.34% from 21.47% recorded in the previous month.
Announcing the committee’s decision, CBN governor, Godwin Emefiele said, “MPC was of the view that although inflation rate moderated marginally in December, the economy remained confronted with the risk of high inflation with adverse consequences on the general standards of living.
“Committee, therefore, decided to sustain the current stance of policy at this point in time to further rein in inflation aggressively.
“MPC voted to raise the MPR to 17.5 per cent, retaining the asymmetric at +100/-700 basis points around the corridor.”
However, some economy stakeholders disagreed with the apex bank, noting that the rate hike will hurt investors in the real economy, thereby jeopardising economic growth.
The Managing Director/ Chief Executive Officer of Cowry Asset Management limited, Mr. Johnson Chukwu, told Business Hallmark, that he has never supported increase in monetary policy rates because he understands that the factors driving inflation in the country are not demand driven, but supply driven.
“If you look at current inflationary pressure, it is not coming from excess liquidity occasioned by credit expansion, it is rather coming from the shortage of supply of food items as well as the effect of depreciation of the local currency’’, Chukwu said.
‘’So those factors cannot be addressed by increasing interest rates and that is why if you recall when the CBN first increased the monetary policy rate last year from 11.5 to 13 percent inflation rate for April 2022 was only 16.8 percent.
“We have gradually increased interest rates by 500 basis points, yet inflation has gone to 21.34 percent, indicating that the increases we have made on the rates have not had the desired impact on inflation because the current inflation is driven by supply shortfall.
‘’You know that farmers have been displaced and they are no longer producing enough farm produce which has therefore affected negatively supply of food. The other factor I mentioned was that if your currency depreciates, your landing cost of imported food or whatever it is will be higher so, increasing interest rate will not affect those things positively.
‘’If you want to fight inflation you look for the root cause of inflation. You must not use the same tool to fight every type of inflation and I think that until we address the root cause of the current inflation in the country the approach of monetary policy using increase in monetary policy rate, increase in cash reserve ratio may not solve the problem.’’
Similarly, Founder and CEO, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, said the implication of the rate hike is that lending rates will increase for investors that are indebted to the banks, further implying an increase in cost of production.
He added that the hike would ultimately impact adversely on economic growth, while challenges of access and cost of credit by small businesses would be further elevated.
Yusuf identified key drivers of inflation, which he said are not within the purview of the CBN, to include, exchange rate depreciation, foreign exchange market illiquidity, insecurity, high energy cost, especially diesel cost, climate change and the massive injection of liquidity into the economy through the controversial ways and means financing.
For a professor of Capital Market and Chairman Chartered Institute of Bankers of Nigeria, Abuja Branch, Prof Uche Uwaleke, said the hike is not good news for struggling businesses in Nigeria and for output growth in general.
According to him, the MPC should have maintained the status quo in view of the pause in inflationary pressure, declining GDP growth, ongoing implementation of cash withdrawal limit, which will ultimately reduce the money supply, and the fact that supply-side factors are major inflation drivers in Nigeria.
Uwaleke noted that with this development, banks may have to re-price their loans which may further jeopardize their risk assets and worsen asset quality.
On the contrary, experts and researchers at Cordros Securities had expected a rate hike after the MPC meeting.
In a report, they stated, “Elsewhere, the prospect of global central banks embarking on smaller interest rate hikes could also influence the MPC’s decision to toe the same line amid concerns about the domestic economy. Thus, we expect the MPC to opt for smaller rate hikes in the short-term, given the build-up of pressures in the local economy and as the risks of over-tightening come to the forefront of policy discussions. Consequently, we expect the committee to increase the MPR further by 50bps – 100bps and retain other policy parameters.”
According to the report, the committee remained faced with either maintaining its hiking cycle or keeping policy parameters unchanged.
It added, “Therefore, we expect the committee to assess the domestic and global economic environment in the context of developing key economic and financial indicators since its last policy meeting in November. In our view, the MPC is likely to be concerned about the pressure on the domestic economy, given the slow growth recorded in Q3, 22022, more so that the manufacturing sector posted its first contraction since Q4, 2020.’’
Meanwhile, manufacturers under the auspices of the Manufacturers Association of Nigeria (MAN) have continued to lament high interest rates affecting companies in the industrial sector, noting that made-in-Nigeria goods would continue to be uncompetitive if interest rate remains at double digits.
Speaking recently at a three-day Made-in-Nigeria exhibition ceremony, the president, MAN, Engr. Mansur Ahmed, said there is nowhere in the world where manufacturers borrow at more than 25 per cent to produce and be competitive at the same time.
“The policy environment is the first determinant of the success of our operations; if you have policies that promote local production, such as the Executive Orders, backward integration policies and initiatives in the agriculture sector that is being supported by the Central Bank of Nigeria (CBN), they are all good policies, but we need these policies to be sustained,” he said.
The International Monetary Fund (IMF), via its mission to Nigeria, had ahead of the last MPC meeting of last year in November called on Nigera’s monetary policy authority to “stand ready to further increase the MPR to send a tightening signal.”
The mission welcomed measures taken by CBN to tighten liquidity and curb inflationary pressures by increasing the MPR by a cumulative 400 basis points and raising the cash reserve ratio (CRR) at its September 2022 meeting.
It, however, said overall conditions remained accommodative since the MPR was below inflation. It also lauded the financing provided to the budget and the CBN’s directed lending schemes continue to drive strong monetary expansion.
The global lender said a decisive and effective monetary policy tightening was a priority to prevent risks of de-anchoring of inflation expectations.
