The Monetary Policy Committee of the Central Bank of Nigeria has raised the benchmark interest rate from 15.5 to 16.5 per cent in order to rein in inflation and maintain economic stability.
Speaking at the end of a two-day Monetary Policy Committee meeting on Tuesday in Abuja, the CBN Governor, Godwin Emefiele, said the committee voted to raise the rate to 16.5 per cent while retaining the asymmetric corridor of +100/-700 basis points around the benchmark interest rate, also known as the monetary policy rate.
He said the MPC also voted to retain the cash reserve ratio at 32.5 per cent and the liquidity ratio at 30 per cent.
“The Committee’s choices were on whether to further hike rates or pause for the impact of the last three rate hikes to continue to feed through the economy. At this MPC, therefore, the options considered were primarily to hold or further tighten the policy rate. The option to loosen was not considered as this would gravely undermine the gains of the last three rate hikes,” Emefiele said.
This was the fourth time the committee would be raising the benchmark interest rate since May when the rate was moved upwards from 11.5 to 13 per cent. The rate has since increased to 14 per cent in July, 15.5 per cent in September, and to 16.5 per cent in November.
“At this meeting, the MPC was concerned that the global inflationary pressures have continued to trend higher and financial markets were also facing challenges. It observed that this was indeed the trend in Nigeria, with inflation attaining 21.09 per cent in October, 2022,” he said.
Inflation has risen from 15.92 pr cent in March to 21.09 per cent in October, due to cost of production, demand and external factors.
Manufacturers’ N5.1tn debt
Operators in the nation’s manufacturing sector saw their combined debts to Nigerian banks rise from N4.09tn in December 2021 to N5.1tn in September 2022, according to the CBN’s Sectoral Analysis of Deposit Money Banks’ Credit.
This showed that they borrowed the sum of N1.01tn between December 2021 and September 2022.
With the increase in debts, stakeholders have maintained that the current double-digit lending rate was unfavourable as it had a direct impact on the cost of production and the competitiveness of the sector.
Members of the organised private sector and economists have however reacted to the MPC’s interest rate hike, saying it will lead to production shutdowns and higher bad loans.
The former President of the National Association of Small Medium Enterprises, Mr Degun Agboade, said the association was complaining about the old rate before the current hike.
“We are in a worse situation. Nothing has improved in terms of infrastructure. In fact, the infrastructure is getting worse. You can’t move on the roads; diesel price has moved up, and there are a whole lot of problems. In the midst of that, you still raised the interest rate? That is adding insult to injury.”
A professor of Economics at Covenant University, Ota, Jonathan Aremu, said the decision of CBN’s MPC reflected an economic theory that stated that for an economy to remain robust, the quantity of money in circulation must reflect the volume of production and consequently the volume of trade/transactions.
In a recent interview, the Deputy-President of the Lagos Chamber of Commerce and Industry, Dr Gabriel Idahosa, had criticised the MPC’s rate hikes.
Idahosa said, “Our own economy cannot stand this kind of rate hikes, where you have unemployment and inflation. Manufacturers are not able to cope with current interest rates because of the cost of production. Diesel alone is sending many of them out of business. If you now add a high-interest rate, it’s not good for businesses that are already suffering from those other issues of inflation and power supply. They are supposed to do it on paper because the monetary policy says if you have inflation, you should increase interest rates.”
In an interview with The PUNCH, the Director-General of the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture, Sola Obadimu, said that attempts to curb the excesses of inflation through the hike in monetary policy rate would lead to a dead end.
“I have been saying this, the increase in the monetary policy rate has not been working. Since they decided to raise the MPR, has it brought down inflation? It has not. And manipulations by the monetary policy committee cannot bring down inflation.
“They are trying to deal with inflation, but they are not succeeding. The naira is getting weakened so inflation will continue. There are also fears of the regularisation of fuel prices that is looming. All these things will impact inflation. The hiking of interest rates has not stopped inflation from going up. Now, this means that the commercial bank will now be lending at a 20 -25 per cent interest.
“I doubt if any loan can go for lesser than that. This means we will continue to experience this cost-push inflation because of cost the your input is going up. There is no way you can sell at a lower price. It is normal and the cost of money is also one of the inputs. You are taking a bank loan and there is the cost of servicing and paying back with both principal and interest. These things can only aggravate the situation. There is a need to inject capital into the system and strengthen infrastructure, it is not a day job. So all these manipulations can only work in the short term.”
The Director, International and Public Sector Relations, Lagos Chamber of Commerce and Industry, Temitope Akintunde, said: “The hike in interest rate is to curb inflation but doing this will lead to higher interest rates. Many businesses are already going through the challenges, from cost of the production to cost of doing business. So, increasing the interest rates at this time is also going to add to the many problems that people already have. The forex issue is also still existent. This is something that a lot of businesses are grappling with.”
Akintunde said the interest rate hikes might not curb inflation.
Also reacting, some economists have warned the MPC that the decision to maintain an aggressive monetary tightening stance may have unintended consequences on the economy, warning that the hike in the MPR from 15.5 per cent to 16.5 per cent would increase non-performing loans, mar the productive sector and weaken economic growth.
The Chief Executive Oficer, the Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, said the MPC needed to address the issues in the supply side to proffer a permanent solution to the worsening inflation in the economy.
Also, economist and CEO of Cowry Assets Management Limited, Mr Johnson Chukwu, said, “This MPC decision will lead to a contraction in economic activities. If we continue in this trajectory (tightening of monetary policy), cost of credit will increase, and cost of goods will go up. In simple term, the cost of credit will increase beyond the gross margin of businesses. As such, banks will only lend to only traders. We are going to shut down the productive sectors with this stance. The question is, will this decision increase the volume of foods produced? I think the decision may have very hard unintended consequences.”
He said with a higher MPR, businesses might not have enough to repay their loans.
Investors dump stocks
A stock market analyst, Wole Samuel Adeyeye, said a lot of stock investors were already taking their money out of the equities market to leverage the expected high yields on bonds and commercial paper, which are expected to increase.
A senior capital market analyst, Rasheed Yusuf, noted that the situation would make borrowing more expensive.
A stock market analyst, David Adonri of HIGHCAP, said the rate hike was targeted at tightening the money supply in the economy.