Inflation rate: Mixed reactions as CBN again raises MPR to 17.5%

…CBN should strategise alternatives to reduce inflation — DG NACCIMA

…Interest rate hike will hurt productive sector, Nigeria’s economy — Gbolade

…Hike in MPR from 16.6% to 17.5% will hurt investors in the real economy — CPPE

By Seun Ibiyemi, Omolola Adeyanju, Ogaga Ariemu

Again the Central Bank of Nigeria (CBN) increased the benchmark of Monetary Policy Rate (MPR), also known as interest rate, from 16.6 per cent to 17.5 per cent as a way of tackling inflation.

This is contained in a communiqué issued at the end of the first MPC meeting in 2023, in Abuja on Tuesday.

CBN Governor, Mr Godwin Emefiele, who read the communiqué said that  previous increases had yielded results, with the slight drop in the inflation rate recorded in December 2022.

The committee, however, held all other parameters constant.

While the Assymetric Corridor of +100/-700 basis points around the MPR was retained, the Liquidity Ratio of 30 per cent and the Cash Reserve Ratio (CRR) of 32.5 per cent were also retained.

Recall that the MPR had witnessed four consecutive increases, from 11.5 per cent in early 2022 to 16.5 in November 2022.

According to Emefiele, the committee deliberated on whether to hike rates further or hold on to examine the impact of the past increases.

“The options considered were primarily to hold the rate or tighten it further to consolidate the previous gains.

“However, the MPC noted that loosening the rate would gravely undermine the gains of the last four increases, hence the hike in rate,” he said.

Note that the latest increase in the MPR represents the highest rate in over 21 years, since 2001 when the benchmark interest rate averaged 20.5 per cent. Also, this represents the fifth consecutive increment in the monetary policy rate.

The CBN has also maintained that it would not be extending the deadline for the extinction of the old naira notes from 31st January 2023. Highlighting that the 100-day window is more than enough to deposit all old naira notes in circulation to the banks.

Some financial experts had projected that the apex bank would most likely retain the previous rates.

CBN should strategise alternatives to reduce inflation, increase of IR is ineffective- DG NACCIMA

In the space of seven months last year, from 23rd of May to November 22nd, the Central Bank of Nigeria increased the interest rate four times consecutively from 13.0 per cent to 16.5 per cent as at November 22nd.

Yesterday, the Monetary Policy Committee((CBN) decided another increase of interest rate to 17.5 per cent. Reacting to this, the Director General, Nigerian Association of Chambers of Commerce, Industry, Mine and Agriculture (NACCIMA), Sola Obadimu enumerated the consequences of the increase, “It will contribute to cost push inflation.

“Money is a critical input in the cost of production. When commercial banks take loans from CBN, it’s assumed that they are buying money and the interest rate is the cost of funds.

“Money is a fiscal input in production or service industry. Central banks normally raise interest rate to control inflation. It was increased consecutively four times last year. Yes, but it didn’t help to achieve reduction in inflation. It doesn’t work most of the time because it’s a reactive measure.

“What they have done now is raising the interest rate of their loans to commercial banks. Commercial banks in turn will raise the interest they lend to customers above the 17.5 interest rate

“Now the interest rate for customers of commercial banks will get higher than what is previously obtainable. If they loan to businesses at 20 per cent, and add administrative charges and other charges, the interest rate is likely to increase to the region of 25 per cent.

“This will naturally increase inflation because it will drastically affect production and there’s no way any enterprise will sell below production cost.

“CBN is hoping it will help to dwindle the rate of inflation but in the contrary, it always almost leads to inflation.

“NACCIMA is concerned about this and we hope the committee will look beyond this singular strategy. They should look at other alternatives to bring down inflation as this particular strategy doesn’t seem to give any positive result.”

Interest rate hike will hurt productive sector, Nigeria’s economy —  Gbolade

A financial expert, Mr Idakolo Gbolade, said the CBN’s interest rate hike would hurt the productive sector and Nigeria’s economy.

He stated the bank’s decision to increase interest rate in the past has not yielded any result.

“The MPC believes that consistent increases in the interest rate caused the slight easing of the inflation rate in December,  2022 and they believe that further increases will stem inflation in January and beyond.

“However, reality on ground has shown that continuous increases in interest rate will stifle the productive sector and cause default on loan  facilities repayment due to factors like insufficient supply of energy, insecurity and high cost of production that has affected profitability of most companies. This interest rate hike would also limit the capacity of the industrial sector to take more loans for expansion.

“The economy is already challenged in 2023 due to election anxiety and possible inactivity of the incoming government to save the economy through the year. Increase in interest rates by the CBN will further hurt the economy in 2023.”

Hike in MPR from will hurt investors in the real economy — CPPE

Reacting to the development, in a chat with Nigerian NewsDirect on Tuesday, the Chief Executive Officer (CEO), Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, said CBN’s hike in MPR from 16.6 per cent to 17.5 per cent will hurt investors in the real economy.

He said the implication is that lending rates will increase for investors that indebted to the banks.

This would further imply an increase in operating and production costs.

The hike would ultimately impact adversely on economic growth. Challenges of Access and cost of credit by small businesses would be further elevated.

Muda said that, “The Monetary Policy tightening has very limited impact on inflation.  This is not a credit driven economy.  Consumer credit is not on a scale to be reckoned with.

“Key drivers of inflation are as follows: Exchange rate depreciation,  foreign exchange market illiquidity, insecurity, high energy cost, especially diesel cost,  climate change and the massive injection of liquidity into the economy through the controversial ways and means financing.

“Most of these factors are not within the purview of the CBN.

“On the Currency exchange,  it is evident that CBN has serious production and logistics limitations with regards to the new currency notes.

The most realistic option is  to extend the deadline. Otherwise, there will be very serious business disruptions, especially within the SMEs space, the informal sector and the rural economy. Many innocent Nigerians will lose their hard earned money,” he said.

CBN should reconsider its stance on formulating anti-people policies -Prof Godwin Oyedokun

Also, an Accounting and Financial Development don at Lead City University, Ibadan, Prof Godwin Oyedokun, said CBN should reconsider its stance on formulating anti-people policies.

“I think there is more to CBN’s behavior recently. I don’t understand why some people just sit down somewhere and keep formulating policy that are anti-people.

“The issue of naira redesign, inflation, other challenges are there yet the CBN is still jacking up interest rate.

“It is high time  for the CBN to be more reasonable about policies. Out there if interest rate is escalated as it is case now, it means the cost of funding will be high, this will be passed on to consumers also increasing the prices of good and services.

“However, what the CBN is doing is to increase interest rate to fight inflation but this should be thoroughly looked at,” he stated.