Depositors, not shareholders own banks - CBN
Godwin Emefiele, CBN governor


Ahead of this week’s Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN), slated for 26 and 27 September 2022, there are strong indications that businesses are already bracing up for the effect of yet another hike in the benchmark interest rate.

But experts warn that any further increase in Monetary Policy Rate, MPR, may plunge the economy into recession, the third under this administration, which, unlike previous recessions, may be difficult to recover from, given the worsening economic indices of the country, particularly the rising oil price and subsidy, and declining production output, thus compounding the revenue challenge of the country.

Defiant inflationary trend is piling pressure on the apex bank to consider another upward review of the Monetary Policy Rate (MPR), after two previous hikes in quick succession failed to bring skyrocketing prices of goods and services under control.

Latest data from the National Bureau of Statistics (NBS) revealed that Nigeria’s inflation rate rose by 20.52 percent in the month of August 2022, the highest pace since September 2005.

The benchmark interest rate was first raised in May to 13 percent from 11.5 percent and then to 14 percent in July after the NBS reported five-year high inflation of 18.60% in June and moved up to 19.64 percent, the highest since 2005.

The latest figures are likely to trigger another rate rise from the apex bank, making it the third time this year, with the implication of exposing businesses to higher finance costs in the second half of the year.

On Wednesday, the U.S Federal Reserve announced a third consecutive rate hike of 75 basis points and projected interest rates to rise to 4.6 percent in 2023.

“We want to act aggressively now, and get this job done, and keep at it until it’s done,” Reuters quoted Fed Reserve Chairman Jerome Powell as saying. “We have to get inflation behind us. I wish there was a painless way to do that (but) there isn’t.”

Available records show that three 75-basis-point rate hikes in a row is unprecedented since the Fed explicitly started targeting the federal funds rate to conduct monetary policy in the late 1980s.

The rate hike brings the central bank’s benchmark interest rate, the federal funds rate, to a new range of 3.0 percent to 3.25 percent — its highest level since 2008 — from a current range between 2.25 percent and 2.5 percent.

Following higher borrowing costs, the Fed said Wednesday it expects the U.S economy to grow just 0.2 percent this year and 1.2 percent in 2023, below its June estimate of 1.7 percent for both years, according to officials’ median estimate. It predicts the 3.7 percent unemployment will rise to 4.4ercent by the end of next year, well above its prior forecast of 3.9 percent.

Similarly, the Reserve Bank of India’s (RBI), is likely to hike the benchmark rate by 35-50 basis points next week as it fights multiple challenges of escalating geopolitical tension in Ukraine, a hawkish U.S. Fed, plunging rupee, mixed growth signals, and rising food inflation, according to Forbes Magazine.

With the CBN likely to raise rates again during the MPC meeting beginning from Monday, it is believed that the cost of borrowing across the country will rise in tandem. The apex bank gave the signal to this policy step last month when it increased interest rates in regulatory forbearance for its intervention loans from five percent to nine percent.

Like the Fed, the CBN also seems to have chosen price stability over growth at the moment, thus the urgent need to raise rates. This can be read from the personal statements of members of the MPC at the last meeting in August.

The CBN had said: “Aside from narrowing the negative real interest rate gap, members were also of the view that tightening rates would signal a strong determination of the Bank to aggressively address its price stability mandate and portray the MPC’s sensitivity to the impact of inflation on vulnerable households and the need to improve their disposable income”.

CBN Governor, Godwin Emefiele, took it further and said: “I am convinced that policy tightening, to a significant degree is crucial at this time. I believe that given the over 84 and 200 basis points increases in headline and food inflation, respectively, aggressive tightening is necessary to dampen pervasive inflation, contain expectations, and provide forward guidance.”

While most analysts do not doubt the possibility of the MPC hiking the rate further in the wake of Nigeria’s rising inflation, they are of the view that both the fiscal and monetary authorities should adopt more holistic measures as monetary policy tightening alone would not assuage the situation.

Professor of Economics and Public Policy at the University of Uyo, Akwa Ibom State, Akpan Expo, highlighted the fact that higher interest rates would not solve the inflation problem.
Ekpo believes that increasing interest rate would not reduce the inflation rate because the problem was structural and not demand-driven.
“Well, in developed countries, central banks, when they have this kind of problem, increase interest rates to fight inflation. So, the CBN may do it but it won’t have any impact. They’ve done it twice and inflation keeps going up,”, the former Vice-Chancellor.

Similarly, a professor of Capital Market at the Nasarawa State University, Keffi, Uche Uwaleke said the 20.52 per cent year-on-year inflation increase was expected, but noted that monetary policy tightening alone may not resolve the situation.

Uwaleke said the increase in headline inflation above the psychological threshold of 20 per cent did not come as a surprise in view of the rising inflation trend in many economies, partly caused by the Russian-Ukrainian conflict.
“It’s interesting to note that the NBS, in its latest CPI report, provided a clue as to the major factors driving the inflationary pressure in Nigeria, namely supply disruptions and rising cost of production.”, he said.

“In the light of this revelation, what becomes clear is that the monetary policy tightening stance of the CBN alone may not address the challenge.

“The government needs to formulate and implement complementary fiscal policies aimed at boosting food supply as well as reducing firm’s cost of production.”

Fiscal Policy Partner and Africa Tax Leader at PwC, Taiwo Oyedele, is not in support of increasing the benchmark interest rate any further. According to him, to slow down the rate of inflation, government should improve security to enable farmers return to their farms while addressing the inefficiencies in the energy supply chain.

“There is also a need for relevant fiscal policy measures, such as suspension of the new excise duties on telecommunications services and non-alcoholic beverages, to complement the monetary policy measures aimed at controlling inflation”, he said.

“I will advise the MPC not to further increase MPR as doing so will only constrain the ability of businesses to fund their existing capacity and expansion needed to improve the supply side problem, thereby further fueling inflation rather than slowing it down.”

However, a senior lecturer and economist at Pan Atlantic University, Olusegun Vincent, said although the CBN had been reluctant in raising rates, it was becoming almost inevitable.
“You will notice that CBN has always been reluctant to jack up the monetary policy rate, which is a reflection of our interest rate in the economy, currently 14 per cent.

“And we see inflation at 20.52 per cent. Also, don’t forget that the food inflation is about 23 per cent. Despite all these, I believe the current figures don’t reflect the general price increase of commodities in the market.”

He believes that in order to combat the rising inflation, putting the interest rate on par was always the first course of action to create a balance.

“For me, personally the interest rate should go up because at the current figures, what we have is an abnormality. The interest rate is running below the inflation rate. Normally, the interest rate should be equal to the inflation rate plus the premium.

“The last level of interest rate should be equal to the inflation rate. So as it is, the CBN has no choice but to respond to the increasing level of the inflation rate because the only way to address this problem is to increase the interest rate.”

Disturbingly, Moody’s new report says African banks will respond to the rising inflation and associated higher savings rates with an upward re-pricing of loans.

The response, the report foresees, would weaken borrowers’ capacity to repay existing loans and increase banks’ provisioning for loan loss. It, however, notes that most of the banks “took proactive provisions following the outbreak of the pandemic,” which will limit the extra provisioning required as defaults rise.

“The impact on Nigerian and Kenyan banks’ margins will be muted because their interest rates are already high and some of their deposit rates are index-linked to the policy rate.
“African banks’ sizeable holdings of government debt securities will fall in value as interest rates rise, but these unrealised losses are unlikely to crystallise,” the Moody’s Corporation’s arm states.

In Nigeria, specifically, the report notes that large volumes of the loans are short-term; hence, they will be re-priced higher. This, it adds, could be constrained by already higher lending rates and stiff competition.

According to data from 30 of the largest companies on the Nigerian Exchange, net finance cost has risen from N148 billion in the first half of 2021 to N203 billion in the same period this year.

Total debts have risen to N2.8 trillion in the first half of 2022 compared to about N2 trillion in the same period last year. It is expected that finance costs will rise further in the second half of the year due to a combination of more loans and higher interest charges.

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