Again, CBN increases interest rate to 27.25%
…Decision to further tighten interest rate unanimous — Cardoso
…MPR hike will slow down investments, economic growth — Experts
By Seun Ibiyemi
The Central Bank of Nigeria (CBN) raised its Monetary Policy Rate (MPR) by 50 basis points on Tuesday, bringing the benchmark interest rate to 27.25 percent. This marks the fifth consecutive rate hike this year.
Following a two-day Monetary Policy Committee (MPC) meeting in Abuja, CBN Governor Olayemi Cardoso announced the unanimous decision by the 11 committee members to increase the rate.
The move aims to further curb inflationary pressures, despite signs of moderating inflation.
In addition to the MPR hike, the CBN also raised the Cash Reserve Ratio (CRR) for commercial banks by 500 basis points to 50 percent, up from 45 percent.
Merchant banks saw a smaller increase, with their CRR raised by 200 basis points to 16 percent, up from 14 percent.
The CBN retained the asymmetric corridor around the MPR at +500/-100 basis points, while keeping the liquidity ratio unchanged at 30 percent.
Although many analysts had predicted a pause in rate hikes due to easing inflation the CBN opted for further tightening to ensure inflation remains under control.
However, Nigeria’s apex bank chose a hawkish stance, signalling its determination to tackle persistent inflationary pressures.
This bold move comes as global financial conditions are expected to ease, yet Nigeria has opted to tighten monetary policy, a decision that surprised many observers.
In a candid and resolute Monetary Policy Communique, CBN Governor Olayemi Cardoso offered a sobering assessment of the state of the Nigerian economy.
While recent drops in inflation provided some relief, Cardoso made it clear that now was not the time for complacency.
While headline inflation in Nigeria showed some moderation in recent months, core inflation remains stubbornly high, driven by the rising costs of energy.
The CBN reported that headline inflation eased to 32.15 percent in August 2024, down from 33.40 percent in July, mainly due to a reduction in food inflation.
However, core inflation, which excludes volatile items like food, actually increased to 27.58 percent from 27.47 percent during the same period.
The CBN emphasised that core inflation needs to be addressed because it reflects the underlying inflationary pressures in the economy: “Core inflation has remained elevated, driven primarily by rising energy prices.
Nigeria’s growing money supply has led to excess liquidity in the financial system, which is putting pressure on the foreign exchange market.
The CBN noted that addressing this liquidity glut is critical to reducing demand pressures on foreign exchange, which could otherwise destabilise the naira.
They noted that “the continued growth in money supply” was causing a rise in liquidity, necessitating the tightening of monetary policy to prevent further depreciation of the currency.
The external reserves have seen some improvement, standing at $39.07 billion as of September 19, 2024, up by 17.4 percent compared to $33.28 billion in the same period of 2023.
This reserve position represents eight months of import cover for goods and services. Stabilising the naira is crucial to maintaining this reserve level and preventing capital flight.
One of the key successes of the CBN’s hawkish stance has been the stabilisation of the exchange rate.
The bank has managed to reduce volatility across different segments of the foreign exchange market, which is critical for fostering investor confidence and encouraging long-term planning.
The MPC pointed out the “relative stability and convergence in the exchange rate across the various market segments,” attributing this stability to the tight monetary stance.
By stabilising the exchange rate, the CBN says it aims to enhance Nigeria’s attractiveness to international investors, especially as inflation moderates.
The CBN also states that maintaining a strong currency is essential for encouraging foreign direct investment (FDI) and bolstering economic growth.
Another reason the CBN gave is that it is keen on making Nigeria a more attractive destination for foreign investment by achieving a positive real interest rate.
Despite the recent moderation in headline inflation, Nigeria’s real interest rate remains negative.
The MPC acknowledged that this was a problem for drawing international capital into the economy.
To change this, they stressed the importance of sustaining efforts to make the real interest rate positive, stating, “To attract investments into the economy, efforts must be sustained to achieve a positive real interest rate.”
This means that even after inflation, investors should see a net positive return on their investments.
With global competition for capital fierce, a positive real interest rate would significantly enhance Nigeria’s attractiveness on the international stage.
The CBN also raised alarms about Nigeria’s growing fiscal deficit and how it impacts the liquidity in the banking system.
The Federation Account Allocation Committee (FAAC) releases funds to various tiers of government, and these releases inject large sums of liquidity into the system, which can disrupt monetary policy efforts.
The CBN highlighted a “strong correlation between FAAC releases and liquidity levels in the banking system as well as its impact on the exchange rate,” making it crucial to monitor these releases carefully.
In the broader context of Nigeria’s fiscal situation, the MPC noted concerns about the rising fiscal deficit but welcomed the fiscal authority’s commitment not to resort to monetary financing (printing money).
Still, with excess liquidity from FAAC releases feeding into the system, tighter monetary policy is essential to prevent these liquidity injections from pushing inflation higher.
…Decision to further tighten interest rate unanimous — Cardoso
Reacting to the increase, Yemi Cardoso, has said the decision by the Monetary Policy Committee (MPC) of the apex bank to further tighten the Monetary Policy Rate (MPR) was unanimous.
“This is expected to improve confidence, which will enable economic agents to plan in the medium to long term,” he said.
He said that the committee was, however, unanimous in recognising that a lot more was required to actualise the price stability mandate of the CBN.
“The MPC noted that even though headline inflation trended downwards due to a moderation in food inflation, core inflation has remained elevated, driven primarily by rising energy prices.
“The uptrend poses severe concerns to members, as it clearly indicates the persistence of inflationary pressures.
“Members thus reiterated the need to work in close collaboration with the fiscal authority to address the current upward pressure on energy prices,” he said.
He said that the committee was also concerned about the need to mop up excess liquidity, address foreign exchange demand, as well as growing fiscal deficit.
He, however, ruled out the Ways and Means option in addressing the deficit.
“The MPC noted the continued growth in money supply, recognising the need to curtail excess liquidity in the system as well as address foreign exchange demand pressures.
“Members were also concerned about the growing level of fiscal deficit but acknowledged the commitment of the fiscal authority not to resort to monetary financing through Ways and Means.
“Furthermore, members observed a strong correlation between Federation Accounts Allocation Committee (FAAC) releases and liquidity levels in the banking system as well as its impact on the exchange rate.
“The Committee, therefore, agreed to increase monitoring of future releases with a view to addressing its effects on price developments, “ Cardoso said
…MPR hike will slow down investments, economic growth – Experts
The Centre for the Promotion of Private Enterprise (CPPE), has said that the Central Bank of Nigeria (CBN)’s decision to tighten financial conditions would hurt businesses and slow down investments and the economy.
Chief Executive Officer of CPPE, Dr Muda Yusuf, made the observation in a statement on Tuesday while responding to the outcome of the Monetary Policy Committee (MPC) meeting of the CBN.
According to Yusuf, it is sad that CBN further tightened monetary policy at a time manufacturers, entrepreneurs and other investors in the economy are struggling and need succour.
He said that the latest decision was at variance with the mood of most economic players at this time.
“What manufacturers and other investors need at this time is some oxygen and stimulus, not policy measures that will worsen an already suffocating situation.
“The MPR at 27.25 per cent; CRR at 50 per cent, and asymmetric corridor at +500 and -100 are very difficult monetary conditions to bear for most businesses.
“This is given the prevailing macroeconomic and structural conditions,” he said.
Yusuf said that the second quarter GDP numbers showed clearly that the economy was still in a floundering mode, adding that many critical sectors of the economy slowed during the quarter.
He listed the sectors to include manufacturing and its other sub sectors such as cement, food and beverage, chemicals and pharmaceuticals, trade, ICT and real estate.
He said that the road transport, motor assembly, publishing and motion pictures sectors contracted during the quarter while aviation, oil refining, textile, livestock and quarry and minerals sector were still in recession.
“Tightening financial conditions in the circumstances does not seem appropriate.
“The private sector should not be made to pay the price of liquidity growth which it was not responsible for. Issues of excess liquidity should be addressed within a causative context.
“The injection of liquidity into the system are largely public sector driven, as rightly noted by the CBN Governor.
“Therefore, the focus of resolving it should be within that context. Stifling the financial conditions to address liquidity issues is detrimental to investment and growth of the economy,” he said.
According to Yusuf, the implications of the latest MPC decision for investors are quite concerning as cost funds would be further exacerbated.
He said that the situation was made worse by the increase in CRR to 50 per cent and retention of asymmetric corridor of +500 and -100.
“We believe that the policy decisions of the CBN are most inappropriate for the prevailing economic conditions and the challenges faced by entrepreneurs in the country.
“The operating and production costs of businesses will be further exacerbated by the latest monetary policy tightening,” he added.
However, Financial Economist and Director Institute of Capital Market Studies at the Nasarawa State University, Keffi, Prof. Uche Uwaleke, told newsmen that CBN’s decisions would have been for public good.
“In matters like this, the CBN usually has information that may not be at the disposal of the public.
“I want to believe that the members of MPC mean well for the economy.
“They must have taken the decision to further tighten monetary policy based on strong evidence of major threats to exchange rate and inflation.
“All said the task of taming inflation must be jointly tackled by both the monetary and fiscal authorities.
“So, the government has to play its part by controlling recurrent spending and focusing on productivity,” Uwaleke said.
Unemployment rate rises to 5.3 percent in Q1 2024 as economic woes linger
Meanwhile, Nigeria’s unemployment rate in the first quarter of 2024 rose to 5.3%- a 0.3%-points increase from 5.0 percent in the third quarter of 2023.
This is according to the National Bureau of Statistics (NBS) survey for the first quarter of 2024.
According to the report, the unemployment rate for males stood at 4.3 percent, while females experienced a higher rate of 6.2 percent. In terms of location, urban areas recorded a 6.0 percent unemployment rate, compared to 4.3 percent in rural areas.
Youth unemployment during the quarter dropped slightly to 8.4 percent, down from 8.6 percent in Q3 2023. When considering educational attainment, individuals with post-graduate education had an unemployment rate of 2.0 percent, while those with post-secondary education faced 9.0 percent. For individuals with secondary education, the rate was 6.9 percent, and for those with primary education, it stood at 4.0 percent.
In Q1 2024, Nigeria’s labour force participation rate stood at 77.3 percent. When analysed according to location, the rate was higher in rural areas at 82.5 percent, compared to 74.0 percent in urban areas. Among genders, male participation was 77.5 percent, while female participation was slightly lower at 77.1 percent.
In terms of employment-to-population ratio 73.2 percent of Nigeria’s working-age population was employed, a decline from 75.6 percent in Q3 2023.
By gender, the employment-to-population ratio was 74.2 percent for males and 72.3 percent for females. Regionally, the urban employment rate was 69.5 percent, while rural areas had a higher rate at 78.9 percent, both lower than the 71.1 percent and 80.7 percent recorded in Q3 2023, respectively.
The proportion of individuals in self-employment decreased from 86 percent in Q1 2023 to 84 percent in Q1 2024. Survey results show a rise in the share of employed persons working as employees, increasing from 12.7 percent in Q3 2023 to 16.0 percent in Q1 2024.
Among females, the self-employment rate was 87.9 percent, while for males it was 79.9 percent. In rural areas, the self-employment rate was 91.9 percent, compared to 78.2 percent in urban areas.
The share of underemployed Nigerians dropped to 10.9 percent in Q1 2024, down by 1.4 percentage points from 12.3 percent in Q3 2023. The NBS defines underemployment as those who work less than 40 hours a week and are willing to work more.
Among men, the underemployment rate was 8.5 percent, while for women it stood at 12.5 percent. By location, urban areas recorded an underemployment rate of 9.7 percent, compared to 11.8 percent in rural areas.
Furthermore, the report noted that more youths are getting discouraged from seeking employment as the figure in this category rose from 3.1 percent in Q3, 2023 to 3.6 percent in the quarter under review.
The rate of discouraged job seekers was 3.4 percent for males and 3.8 percent for females in Q1 2024.
