Mixed reactions over inflation control
…As CBN again raises MPR to 16.5%
…Plans to reduce volume of N500, N1000
…Raising interest rate alone won’t tame Nigeria’s inflation – Experts
By Seun Ibiyemi, Ogaga Ariemu and Mathew Dennis
Barely two months after it raised the interest rate to a double digit, 15.5 per cent, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) again on Tuesday raised the benchmark interest rate to 16.5 per cent.
This is even as the apex bank announced that it is planning to reduce the volume of N500 and N1000 notes in circulation “over time” to curb inflation.
It had earlier increased the MPR by 100 basis points, from 13 per cent to 14 per cent in July.
Announcing the committee’s decision at the end of its two-day meeting on Tuesday, the CBN Governor, Mr Godwin Emefiele, said the MPC also decided to hold all other parameters constant.
The Assymetric Corridor of +100/-700 basis points around the MPR was, thus, retained, the Cash Reserve Ratio (CRR) was retained at 32.5 per cent and Liquidity Ratio of 30 per cent was also retained.
According to Emefiele, 11 members of the MPC present at the meeting unanimously voted for rates increase.
“Nine members voted to raise the MPR by 100 basis points, while two members voted to raise rates by 50 basis points,” he said.
Emefiele said in reaching the decision on its policy stance, the MPC felt that all the causative factors in the economy, like the Russian-Ukraine war and supply chain disruption were still dominant.
“Loosening option was not desirable at this meeting. The committee also felt that, with the rising inflation, loosening the stance of policy will lead to more aggressive rise in inflation.
“As regards whether to hold, the MPC was of the view that doing that close to December festive season and expected heavy spending during the 2023 general election would jeopardise the gains of previous policy rates tightening.
“It would plunge the economy deeper into the inflation trap,” he said.
He added that the MPC decided to continue tightening, though, at a somewhat moderated rate.
“At this meeting, the options considered were whether to hold or further tighten policy rates.
“The option to loosen was not considered as this will greatly undermine the gains of the three previous decisions,” he said.
In the same vein, the bank governor, Emefiele announced plans to reduce the volume of N500 and N1000 notes in circulation “over time.”
The Governor made this known in his briefing to the media at the monetary policy communique held on Tuesday.
He was responding to questions about the ease of counterfeiting N1,000 notes and if there were plans to reduce the volume.
Mr Emefiele claimed the effort is aimed at curbing the inflation rate which he partly blamed on the higher-denominated naira notes.
He started by using the UK as an example, “In the UK they have a denomination in 50 pounds but the most spent denomination is 20 pounds. Nobody spends 50 pounds. If you go around carrying 50 pounds in the UK they will suspect, sic report you in fact.”
And then comparing this to Nigeria, “The reverse is what is happening in Nigeria,” he said.
“Nigerians want to carry N500 and N1,000. And in fact, we are beginning to think that increasing the high denomination is also part of what is fueling inflation. So in fact, yes, we will launch N200, N500, and N1,000; over time we will reduce the volume of N500 and N1,000 in circulation. Let people carry N50 around.
“If you want to do high-value transactions, embrace online, embrace our agency programme, embrace our mobile banking programme, that is what you need,” he said.
If the Central Bank pushes with this policy as Emefiele alluded to, it is likely to affect some people in the economy.
…Raising interest rate alone won’t tame Nigeria’s inflation — Experts
In a swift response to the apex bank’s policy to raising the interest rate, a Financial Inclusion/Wealth Management expert, Mr Idakolo Gbolade said an interest rate increase alone won’t tame Nigeria’s inflation and ailing economy.
Gbolade who was reacting to the CBN latest interest rate increase to 16.5 per cent made the assertion to Nigerian NewsDirect in a chat on Tuesday.
Shortly after the MPC Meeting on Tuesday, the Central Bank of Nigeria, CBN had announced an 2.5 per cent increase in lending rate.
Giving perspective to the development, CBN Governor, Godwin Emefiele said the move will help tame inflation.
However, Gbolade on the contrary stated that owing to the political atmosphere, the current government may not achieve any change on the nation’s economy before handing over. He added that the decision could further worsen the continued fall of Naira.
“The CBN decision is predicated on their constant effort to tame nigeria’s stubborn inflation which has not relented despite consistent increases on interest rates in the last six MPC meetings.
“The effort is also geared towards mopping up excess liquidity in the economy.
“The CBN is also aiming at boosting investors’ confidence and profitability projections as regards foreign inflows which can impact positively on our foreign reserves.
“The MPC decision could further cause the value of the Naira to continually decline due to persistent scarcity of the Dollar.
“The rising cost of food items will not abate because of the declining value of the Naira.
“Energy cost is also projected to increase as cost of doing business in the sector will significantly increase.
“In fairness to the CBN, these measures are supposed to tame inflation and cause the economy to bounce back, but these policies alone cannot cause the needed change looking at political activities that are unfolding and this present government might not be able to do much before handover in 2023,” he stated.
Raising MPR will spike inflation
Also, the Chief Executive Officer, BIC Consultancy Services, Mr Boniface Chizea said he anticipated that the MPC would increase rates but didn’t expect it to be that high.
“Yes! This was anticipated but probably not as steep as an increase of 100 basis points considering the rapid pace at which the rates have been increased over the last two to three meetings.
“With inflation rate rising beyond 20 per cent now the MPC did not have much of a choice. No corporate treasurer will be ready to save money today and earn returns several bases points below the rate of inflation!
“So, it is imperative to raise base interest rates by this hike. Unfortunately on the other hand, interest rates as factor costs have the potential to spike the inflationary pressures,” he said.
A Professor of Economics at the Olabisi Onabanjo University, Ago-Iwoye, Ogun, Sheriffdeen Tella, who didn’t see the increase coming, said the higher rate would compound inflation.
“When I heard about it, I was shocked. The higher interest rate will compound the inflation woe.
“Government should reduce its expenditure and CBN should stop lending to government. The exchange rate should further appreciate – those are the solutions,” he said.
However, Prof. Ndubisi Nwokoma, Director, Centre for Economic Policy Analysis and Research (CEPAR) University of Lagos, said the increase of the benchmark rate would fight inflation.
“Yes the increase was expected. This is as it should be given that inflation has risen to over 21 per cent and that the burden of debt service is increasing.
“The current negative return to capital vis-a-vis inflation should be addressed with this move.
“Although this tightening of credit by this move will impact negatively on economic growth; it will nonetheless help to fight inflation as well as attract new capital into the economy and address the challenges in the exchange rate of the naira,” he said.
Speaking on the development, the Executive Director of Nigerian Workforce Strategy and Enlightenment Centre (NIWOSEC), Dr. David Ehindero said the increment of Monetary Policy Rate (MPR) by 100 basis points to 16.5 per cent from 15.5 per cent will have implication on the dwindling economy.
He emphasised that the Apex bank must ensure stability in the economy before introducing new guidelines and involvement of stakeholders is necessary too.
He said, “The Government should consider reducing the cost of Governance to enable more public spendings for the masses or tax the masses.
“An increased tax rate is already burdened and inflation infested society like Nigeria is height of insensitivity. Majority of Nigerians can’t access goods in the market, Nigerians are not leaving, they are surviving. Let the government look into reducing cost of Governance and seal every loopholes to the economy through corruption and frivolous spendings.
“Government should also look deep into the padding of our annual budget with projects that will have no direct bearing with the economic growth because the ordinary man doesn’t know what is MPC policy.”
Dr. Enhindero appealed to the CBN to engage the public rigorously in enlightenment especially the issue of currency redesign for better approach amidst the MPC policies implementation.
Also, a Don of Accounting and Financial Development at Lead City University, Ibadan, Prof. Godwin Oyedokun, said investors, borrowers, pensioners will suffer from the policy.
He explained that theoretically, increasing interest rate leads to inflation reduction.
“The issue of interest rate increase is not a new thing, for instance last year, England has been trying to increase interest rate, so as to curb inflation because it is believed that when interest rate is up, inflation will decline.
“While interest is rising, it will cool down prices but would make borrowing more expensive. In the interim, increasing interest rate will reduce inflation. It is within the purview of the Central Bank of Nigeria to intervene on Monetary policy.
“Of course at times it could also impact the cost of prices of products in the market. In theory, inflation and interest rate have inverse relationship; that is when interest rate are low, inflation tends to rise while when interest rate are high, inflation tends to reduce.
“If we have a high rate of inflation what happens is that you lost the value of the equivalent of whatsoever you hold as asset.
“There are two important things we are discussing, the interest rate and inflation. If the interest rate is high, it will increase the cost of borrowing, the borrowers will have to pass the cost to consumers by increasing the price of product/service.
“On the other hand, if you are not borrowing money from bank, instead keep depositing money at the bank for saving or fixing, the rate of returns will be higher.
“Inflation will reduce the value of your savings not from the bank but from the economy. What happens is that certain per cent of inflation would have affected it. So if the interest is high, let’s say 16 per cent and the rate of inflation is 10 per cent, you will be left with 6 per cent.
“Those getting loans will suffer for it while those with deposit in their accounts will gain more money. If you do plus and minus, the situation is better than having a low interest rate.
“Pensioners will also suffer because pension is static and this will reduce their purchasing power. The only set of people that will get are those people who keep their money as deposit with high interest rates,” he said.
