The latest Monetary Policy Rate (MPR) announced by the Central Bank of Nigeria (CBN) has drawn flak from financial and economic analysts who are of the view that it may have a rippled negative effect on the economy in the short, medium to long term.
The CBN through its Monetary Policy Committee for the umpteenth time recently raised the Monetary Policy Rate (MPR), arguing matter-of-factly that previous increases were beginning to yield results and there was the need to keep tightening. Consequently, the MPR was hiked by 100 basis points from the previous 15.5% to 16.5% for the fourth consecutive time.
However, the Committee kept all other parameters constant (asymmetric corridor of +100/-700 basis points around the MPR, the CRR at 32.5% and the Liquidity Ratio at 30%).
The CBN believed that global inflationary pressure was quite high and there was a need to moderate the increasing inflationary concerns. Inflation remains the key consideration for the persistent hike in MPR. Inflation further increased for the 9th consecutive month with headline inflation (year-on-year) rising to 21.09% in October 2022 from 20.77% in September 2022.
The CBN is of the opinion that given the expected uptick in money supply associated with the forthcoming December festive season and the subsequent heavy spending during the 2023 general elections will halt the gains of the previous policy hikes.
This is just as it noted that the option of loosening was not considered given the numerous headwinds the nation currently faces.
Although the CBN is of the belief that raising rates will reduce money supply in the economy and control inflation, however some analysts are of the opinion that this decision could also slow down economic growth in the country. They are of the opinion that there is a possibility that the interest hike would have a negative effect on the country’s growth and of little impact in lowering inflation.
Firing the first salvo, DataPro, a technology-driven credit rating agency in a statement raised some posers, “What happens if the hike is not enough to curb inflation? This leaves the country in a situation of stagflation as economic growth declines, while prices keep rising with wages and employment decreasing,” adding that “A higher interest rate tends to limit the money supply available for purchases, thereby raising the cost of borrowing for businesses and discouraging consumer and business spending. This could force corporate businesses to cut back on spending on new equipment, thus slowing production.”
Echoing similar sentiments, Dr. Muda Yusuf, Director, Centre for the Promotion of Private Enterprise (CPPE), in a statement advised that the deployment of monetary tightening tools should be put on pause.
According to him, the Nigerian economy is not a credit driven economy which is why the tightening outcomes have been inconsequential as a tool to tame inflation. “Over the last one year, the Nigeria inflation story has been a depressing one as reflected in the dynamics of all key price metrics,” the CPPE said.
“The key inflation drivers have not changed over the last few years. They include the following: the depreciating exchange rate, rising transportation costs, logistics challenges, forex market illiquidity, hike in diesel cost, climate change, insecurity ravaging farming communities and structural constraints to economic activities. Fiscal deficit financing by the CBN is also a significant factor fueling inflation through high liquidity injection into the economy.”
“This underscores the need for variabilities in policy responses,” it said, adding that inflation had been spiking despite the serial monetary tightening decisions.
“Inflation restraining strategies should accordingly focus on productivity boosting supply side factors and reduction in ways and means funding of deficit.”