The Monetary Policy Committee of the Central Bank of Nigeria has raised the benchmark interest rate from 15.5 to 16.5 percent to contain inflation and maintain economic stability.
Speaking at the end of the two-day Monetary Policy Committee meeting in Abuja on Tuesday, the CBN Governor, Godwin Emefiele, said the committee voted to raise the rate to 16.5 percent while maintaining the asymmetric corridor of +100/-700 basis points. around the reference interest rate, also known as the monetary policy rate.
He said the MPC also voted to maintain the cash reserve ratio at 32.5 percent and the liquidity ratio at 30 percent.
“The committee’s options were to either raise rates further or to continue feeding the economy with the last three rate hikes. In this MPC, therefore, the main options considered were to maintain the policy rate or to tighten further. The option of easing was not considered, which seriously undermined the gains from the last three rate hikes. because it would harm them,” said Emefiele.
It was the fourth time the committee would have raised the benchmark interest rate since May, when the rate rose from 11.5 percent to 13 percent. Since then, the rate has risen to 14% in July, 15.5% in September and 16.5% in November.
“During this meeting, the MPC was concerned that global inflationary pressures have continued to trend higher and financial markets have also faced challenges. It observed that this was the trend in Nigeria, with inflation reaching 21.09 percent in October 2022,” he said.
Inflation has increased from 15.92 percent in March to 21.09 percent in October due to cost of production, demand and external factors.
Manufacturers debt of N5.1tn
The combined indebtedness of the nation’s manufacturing sector operators to Nigerian banks increased from N4.09tn in December 2021 to N5.1tn in September 2022, according to the CBN’s Sectoral Analysis of Deposit Money Bank Credit.
This showed that between December 2021 and September 2022, the sum of N1.01tn was borrowed.
With the increase in debt, stakeholders maintained that the current double-digit lending rate was inappropriate because it had a direct impact on the cost of production and the competitiveness of the sector.
Members of the organized private sector and economists, however, have reacted to the MPC’s interest rate hike, saying it will lead to production disruption and higher bad loans.
A former president of the National Association of Small and Medium Enterprises, Mr. Degun Agboade, said the association was complaining about the old rate before the current increase.
“We are in a worse situation. In terms of infrastructure, nothing has improved. In fact, the infrastructure is deteriorating. You cannot move on the roads; The price of diesel has gone up, and there are many problems. In the middle of it, you still raised the interest rate? That’s adding insult to injury.”
Jonathan Aremu, a professor of Economics at Covenant University, said the CBN’s MPC decision said that for the economy to remain strong, the quantity of money in circulation must reflect the volume of production and hence trade/transactions.
In a recent interview, the Vice President of the Lagos Chamber of Commerce and Industry, Dr. Gabriel Idahosa, criticized the rate hikes by the MPC.
Idahosa said: “Our economy cannot sustain these kinds of rate hikes, where you have unemployment and inflation. Manufacturers cannot cope with the current interest rates because of the cost of production. Diesel alone is sending many of them out of business. Now adding a high interest rate “If you have it, it’s not good for the companies that are facing these other problems of inflation and power supply. They have to do it on paper because monetary policy says if you have inflation you have to raise interest rates.”
NACCIMA has warned
in an interview PUNCH, The CEO of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, Sola Obadimu, said any attempt to curb the excesses of inflation through monetary policy rate hikes would lead to a dead end.
“I’m saying this, the monetary policy rate hike has not worked. Since they decided to raise the MPR, has inflation gone down? He doesn’t And the manipulations of the monetary policy committee cannot bring down inflation.
“They are trying to fight inflation, but they are not succeeding. Naira is weakening so inflation will continue. There is also apprehension about the regularization of fuel prices. All these things will affect inflation. The rise in interest rates has not prevented inflation from rising. Now, this means that commercial banks will give loans at 20-25 percent interest.
“I doubt that any loan can be lower than that. This means that we will continue to experience this cost-push inflation because your income goes up. There is no way to sell at a lower price. It is normal and the cost of money is also one of the inputs. You are taking out a bank loan and there is a cost of servicing and repayment with principal and interest. These things only made the situation worse. It is necessary to inject capital into the system and strengthen the infrastructure, it is not a day’s work. Therefore, all these manipulations can only work in the short term.’
Temitope Akintunde, Director of International and Public Sector Relations at the Lagos Chamber of Commerce and Industry, said: “The interest rate hike is to reduce inflation, but doing so will lead to higher interest rates. Many companies are already facing challenges, from the cost of production to the cost of doing business. So at the moment “Raising interest rates at this time will add to the many problems that people already have. There’s still the forex problem. That’s something that a lot of businesses are struggling with.”
Akintunde said interest rate hikes may not have reduced inflation.
Economists have warned
Also reacting, some economists warned the MPC that its decision to maintain an aggressive monetary tightening stance could have unintended consequences for the economy, warning that raising the MPR from 15.5 percent to 16.5 percent would increase credit crunch, Mar. weaken the productive sector and economic growth.
The Director General of the Center for the Promotion of Private Enterprise, Dr. Muda Yusuf, said the MPC needed to address the supply side issues to provide a lasting solution to the worsening inflation in the economy.
Also, Mr. Johnson Chukwu, Economist and Chief Executive Officer of Cowry Assets Management Limited said: “This MPC decision will lead to contraction of economic activities. If we continue on this path (tightening monetary policy), the cost of credit will increase, and the cost of goods will increase. In the simple term, the cost of credit will increase beyond the gross margin of businesses. Thus, banks will only lend to traders. With this attitude, we will close down productive sectors. The question is, will this decision increase the volume of food produced? I think the decision will have very severe unintended consequences. that they can.”
He said that with higher MPR, companies may not have enough to repay their loans.
Investors dump stocks
A stock market analyst, Wole Samuel Adeyeye, said many equity investors were already withdrawing money from the stock market to take advantage of the expected high returns on bonds and commercial paper, which are expected to increase.
Rasheed Yusuf, a senior capital market analyst, stated that the situation would make borrowing more expensive.
David Adonri, a stock market analyst at HIGHCAP, said the rate hike was aimed at tightening the economy’s money supply.