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Inflation: CBN under pressure to halt monetary policy tightening

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CBN bans foreign currency as collateral for naira loan

– Persisting interest rate (MPR) hike is killing business – NACCIMA

Consistent monetary policy tightening by the Central Bank of Nigeria (CBN), is raising concerns that the apex bank, in its desperation to tame inflation, may be inadvertently hindering price stability, while also making the equity market unattractive.

The Monetary Policy Committee of the CBN had at the end of its 294th meeting on Tuesday, March 26, raised the benchmark interest rate by two percent (200 basis points) to 24.75 percent.

The was after the banking sector regulator had during its previous meeting, raised the Monetary Policy Rate (MPR) significantly by 400 basis points to 22.75 percent from 18.75 percent.

Also at the last MPC meeting, the apex bank retained the Cash Reserve Ratio (CRR) at 45 percent but increased the CRR of merchant banks from 10 percent to 14 percent and left the liquidity ratio unchanged at 30 percent.

While some analysts believe that the policy step by the CBN will further accelerate the country’s inflation and impose constraints on the private sector’s ability to access affordable credit, thereby leading to massive job cuts, others are of the view that it would make the equity market less attractive to investors.

But the CBN governor, Olayemi Cardoso, had while reading the communiqué at the end of the meeting, noted that the MPC’s decision to tighten the economy was based on economic data and market analysis to tackle the country’s inflation currently at 31.70 per cent in fulfillment of its price stability mandate.

“With respect to growth, yes, there appears to be a trade-off of some sort. We expect the tightening to be short term, not long term. The right response to the policy will influence MPC’s decision to take growth into consideration”, Cardoso said.

“Consequently, at this meeting, the MPC was faced with the option of either progressing with its tightening cycle or hold, to observe the impact of the previous rate hike and adjustment of the Cash Reserve Requirement. After reviewing the balance of risks and the near-term inflation outlook, members were convinced of the need to progress with the tightening cycle.”

Beyond monetary policy

Reacting to the latest hike in MPR, a public affairs analyst, Mr. Richard Ofili, cautioned that it takes a lot more than monetary policy tightening to achieve price stability and growth.

“The one-sided focus on inflation fighting is not enduring and sustainable. It reduces the entire economy to a field of play for monetary players. But in-depth, monetary policy is not 10 percent of an economy, fiscal is many, many, more things”, he said.

“Productivity, real purchasing power of revenue and gainful employment are at the end of the day what deep economic development is measured by, not the money motions.”

On his part, an economist, who pleaded anonymity, noted that Nigeria’s economy suffers from structural defects that make standard economic prescriptions difficult to accept as they typically worsen the situation.

He said: “The classical monetarist prescription to curb inflation is to reduce money supply, which implies a rise in interest rates to snuff out credit demand, encourage savings, and generally cool off demand for goods and services. The problem is that these standard treatments of economic ailments are oblivious to the peculiarity of the structure of African economies.

“Nigeria’s economy suffers from structural defects that make standard economic prescriptions difficult to accept as they typically worsen things. The data on MPR increases and inflation shows a positive correlation; in other words, the higher the MPR, the higher the domestic inflation rate.

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“I am not suggesting that a higher MPR causes higher inflation, but I am saying that rather than the expected negative correlation between the two variables, we are seeing the opposite.”

Research Analyst at Parthian Securities Limited, Miss Mercy Okon, said with the MPR hikes, the local bourse may continue to see bearish trading patterns as investors seek better yields in the fixed-income market.

Okon said: “The impact of the recent hike on the equity market is negative and this is because there is a positive correlation between a hike in interest rate and the fixed-income market. This simply means that an increase in interest rates will result in higher rates in the fixed-income market, thereby making the fixed-income market more attractive.

“This will result in investors, especially, those with a low-risk appetite, pulling their funds out of the equities market into a safer haven (i.e. the fixed-income market) with guaranteed return plus their principal is safe. So, why should they stay back in the equities market?”

Similarly, a Chartered Accountant, Mr. Okwudili Ijezie, making reference to the N1.80 dividend recently proposed by Access Holdings Plc, said ‘”with the MPR of 24.75%, this Access Bank proposed dividend is not attractive.’’

More harm than good

The Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), said it was deeply concerned with the manner in which the apex bank had continued to raise interest rates.

The group in a statement signed by its National President, Dele Oye, and seen by our correspondent, said: “The NACCIMA, representing the collective voice of Nigerian businesses across commercial, industrial, and agricultural sectors, is deeply concerned by the central bank’s approach to curbing inflation and managing excess liquidity through broad-based policy tools that inadvertently impose constraints on the private sector’s ability to access affordable credit.

“Our position, as detailed in our previous communication (Ref: NACC/NP22/23/1249 dated March 13, 2024), remains that the focus of the CBN’s policies should be recalibrated towards addressing the excess liquidity primarily stemming from the public sector’s borrowing habits and expenditure.

“The private sector, which has been effectively sidelined in the bank lending market due to the crowding-out effect, now faces even more severe repercussions”.

Oye noted that the recent rate hikes, while aimed at controlling inflation, were likely to have many negative consequences.

He outlined them to include an increase in the cost of borrowing, adding that “existing loans will incur higher interest rates, raising the cost of capital for businesses. This scenario discourages entrepreneurial activities and expansion plans, which are vital for economic growth and job creation”.

Oye averred, “Restricted credit availability: With the increase in the CRR, banks’ ability to lend is further curtailed. This exacerbates the challenges faced by the private sector, which is already grappling with limited access to finance.

“Pass-through effects on inflation: As businesses incur higher interest costs, they are left with no option but to pass these costs on to consumers through increased prices for goods and services, which can contribute to inflation rather than curb it.

“Stifling economic growth: Tightened monetary conditions may lead to a reduction in investment and consumption, which are essential drivers of economic growth. This could potentially stifle the economic recovery and dampen the prospects for prosperity.”

He recommended that the CBN should pursue a more nuanced and targeted approach, focusing on mechanisms that specifically address liquidity issues in the public sector without placing undue burden on the private sector.

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“Additionally, policy directions should be clear and communicated on a quarterly basis, with a robust stakeholder engagement strategy to ensure that the views and concerns of the private sector are considered in policy formulation.

However, the CBN has disclosed that Nigerian economy saw $1.5 billion inflow within a week after it raised the MPR by 200 basis points to 24.75 percent. Mrs. Hakama Sidi Ali, CBN’s Acting Director of Corporate Communications, who disclosed this in Abuja on Friday, said the development was an indication that the apex bank’s monetary policy efforts were working positively.

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