• It is a measure of panic, NACCIMA, others
• Rising rates will make the cost of capital worse – Economists
• CBN eyes cash cleanup on Thursday
Given runaway levels of global and local inflation, the Monetary Policy Committee of the Central Bank of Nigeria on Tuesday raised the benchmark interest rate from 14 percent to 15.5 percent.
This represents an increase of 150 basis points from the rate of 14% voted at the last meeting of the MPC in July.
It is the third time the apex bank would raise the monetary policy rate, which is the same as the benchmark interest rate, in five months.
The MPC had raised the rate from 11.5 to 13% in May, then to 14% in July, before raising it to 15.5% in a final blow to cash-strapped Nigerian businesses, especially small and medium-sized ones. medium enterprises.
At the end of the MPC meeting, CBN Governor Godwin Emefiele told reporters that 10 members had voted in favor of the rate hike.
The cash reserve ratio (CRR), i.e. the share of a bank’s total customer deposits kept with the central bank in the form of cash, was also raised to 32.5%. against 27.5% since July.
Emefiele announced the decisions after the MPC meeting, saying members were concerned about the continuation of the aggressive move in inflation, “even after the rate hike at its May and July 2022 meeting, and expressed determination to restore price stability while providing the necessary support to strengthen the fragile recovery.
“We will continue to raise the interest rate to reduce the high effect of inflation,” Emefiele said, noting that “the monetary policy theory being tested is that the easiest way to control inflationary pressure is to increase rates.
He explained that the MPC is of the view that with the aggressive political normalization of economies, losing political direction could harm the economy.
“A CBN research study showed that once inflation tends to exceed 12.5 or 13%, it will retard growth. So it’s difficult for us, with all the data available, not to go very aggressively. For some this is not expected as it increases the cost of borrowing, but it is the best we can do. »
“During this meeting, the option of reducing the policy rate was not considered because it would be seriously detrimental to the control of inflation. The committee therefore unanimously decided to raise the policy rate to reduce inflation. interest rate differential and curbing inflation.The committee therefore voted unanimously to increase the MPR.
CBN to mop up cash
Emefiele further said that the CBN would implement aggressive liquidity buffer measures to mop up excess liquidity from commercial banks by Thursday.
He warned banks to fund their accounts immediately, warning that lenders who failed to fund their bank accounts would be denied access to the foreign exchange market.
Experts believe that the measure aims to control inflation and stop the currency crisis.
Naira traded at N718/$ on the parallel market on Tuesday and hovered between N420/$ and N435/$ on the NAFEX window over the past month.
CBN is not obliged to fund airlines
The Governor further stated that the CBN was not compelled by any law to provide dollars to the airlines.
He said the CBN was determined to eliminate the backlog of foreign currency due to airlines as long as their banks were fully funded, noting however that it was not the CBN’s responsibility to provide dollars to foreign airlines. .
Emefiele said the bilateral air service agreements “did not say that you had to repatriate all your dollars through the central bank. There is no law forcing you to buy dollars from the Central Bank.
It is a measure of panic – NACCIMA, others
The chief executive of the Nigerian Association of Chambers of Commerce, Industry, Mining and Agriculture, Olusola Obadimu, called the rate hike a “panic measure”.
“It’s pure panic. They might think that by raising interest rates, investors would be encouraged to stay and others to come and invest.
“However, an economy like ours, heavily dependent on imports, experiencing stagflation and risking recession, would probably stand no chance.”
He said Nigeria must remain committed to its debt servicing obligations and control its appetite for more loans, especially those taken out to finance non-development related efforts – both at federal and state level.
He noted that the federal government must incentivize businesses to source raw materials locally.
“In addition, we urgently need to promote exports, harmonize exchange rates and encourage import substitution.
Deputy Chairman of the Lagos Chamber of Commerce, Mr. Gabriel Idahosa, said the CBN needed to raise the MPR in a bid to stem the rise in the inflation rate which had crossed the 20% mark.
“The economy now threatens to slide into runaway inflation, out of control in the short term. This strong rise in the MPR can contribute to slowing inflation if it is supported by significant efforts to reduce the cost of producing goods and services,” he noted.
He said inflation in Nigeria was largely of the cost-push type, caused by the rising cost of production inputs, including diesel and raw materials.
The former chairman of the Small Scale Industrialists Association of Nigeria, Segun Kuti-George, said what the government was trying to do with the rate hike was simply to attract more investment and reduce inflation.
“That is to say, more people will put their money in banks in the form of time deposits. But they are looking at one side of the coin. In economics, every time you take an action, you have to look at the other side of it. other side very critically.
Rising rates will hurt capital costs, economists say
A capital market professor and Chairman of the Chartered Institute of Bankers of Nigeria, Abuja Branch, Professor Uche Uwaleke, said: “I believe the decision by the MPC to tighten monetary policy further is justified by the need to rein in pressures inflationary and exchange rates and possibly to stem capital outflows due to the rise in key interest rates in developed economies, in particular in the United States and the United Kingdom. The main mandate of the CBN is to maintain price stability.
“But it has serious implications for the cost of capital for businesses, the government’s cost of borrowing, stock market performance and output growth in general. It can also affect the quality of banks’ assets when they revalue their loans in response to the increase in the MPR.
He said lending rates would go up, which doesn’t bode well for small businesses looking to expand.
“Expansion leads to higher production and higher profitability, which will also lead to job creation. When people do not have access to cheap funds, especially MSMEs, it is not not good for the economy.
He may turn against CBN in the dilemma –Experts
The Nigerian consultant to the ECOWAS Common Investment Market, Professor Jonathan Aremu, said interest rates and inflation more or less operate in a very parallel line.
“When one goes up, the other goes up, and so does the exchange rate.
“The central bank is able to do certain things to be able to make sure the interest rate isn’t out of whack. They can make borrowing expensive so more people don’t borrow, and when more people do not borrow, there will be a shortage of money in the market.
“But in most cases, when people need money at any cost, they can get it at any interest. This is what we call the “economic backlash”. Economic backlash is when a policy you put in place to be able to deal with a situation goes in the opposite direction. When you say there are too many naira in the system and then you raise the interest rate to make sure people don’t borrow, note that there are people who don’t need to borrow to advance in their economic activities.