The Monetary Policy Committee of the Central Bank of Nigeria has voted to increase the benchmark interest rate by 400 basis points to a record 22.75 per cent.

The MPR was at 18.75 per cent. The MPC also made a bold move to restrict money supply by increasing the Cash Reserve Ratio to 45 per cent, maintaining a liquidity ratio at 30 per cent while the Asymmetric Corridor was also raised to +200/-700. The CRR was at 32.5 per cent.

The CBN Governor, Olayemi Cardoso, disclosed this while reading the communiqué of the first MPC meeting of the year on Tuesday in Abuja.

However, members of the private sector and economists have faulted the MPC decision, saying it would lead to fresh job losses and possibly lead to recession.

They also argued that history had not shown that increasing interest rates would reduce inflation.

But addressing journalists after a two-day meeting, Cardoso said the move was part of the moves to tame rising inflation.

He said, “All 12 members of the committee decided to further tighten monetary policy by raising the MPR by 400 basis points to 22.75 per cent from 18.75 per cent. Adjust the asymmetric corridor around the MPR to +100 to -700 from +100 to -300 basis points. The committee also raised the cash reserve ratio from 32.5 per cent to 45 per cent while retaining the liquidity ratio at 30 per cent.”

At the last meeting in July 2023, the MPC, headed then by the former acting Governor of the apex bank, Folashodun Shonubi, increased the monetary policy rate by 25 basis points to 18.75 per cent, from 18.5 per cent in May last year. The CRR was retained at 32.5 per cent while the liquidity ratio stood at 30 per cent.

Since then, the MPR had been raised from 13 per cent in May 2022 to 18.75 per cent in July 2023 when the last MPC was held.

Analysts’ expectations had been divergent ahead of the first MPC meeting but the new rate surpassed all projections by financial experts.

According to a Reuters poll released last Friday, the policy rate was expected to be increased by 225 basis points to 21.00 per cent. Other experts had projected between 20 to 21 per cent.

Justifying reasons for the hike, Cardoso explained that members considered various scenarios including whether to hold or hike the policy rate. He said the MPC concluded that inflation could become more persistent in the medium term and pose more regulatory issues if not well-anchored. Thus he said the members voted for a significantly high policy rate hike to drive down the inflation rate substantially.

He mentioned that the meeting extensively discussed various distortions in the foreign exchange market, particularly the impact of speculators exerting upward pressure on the exchange rate, leading to a significant pass-through effect on inflation. The consensus reached involved a substantial policy rate hike aimed at effectively reducing inflation.

He said, “The committee’s decisions were centred on the current inflationary and exchange rate pressures, projected inflation, and rising inflation expectations. Members were concerned about the persistent rise in the level of inflation and emphasised the committee’s commitment to reverse the trend as the balance of risk leaned towards rising inflation. The committee, however, acknowledged the tradeoff between the pursuit of output growth and taming inflation but was convinced that an enduring output expansion is possible only in an environment of low and stable inflation.

“In the opinion of the committee, the options available for decision were to either hold or hike the policy rate to offset the persistent inflationary pressures. Considering the option of a hold policy, the evidence revealed that previous policy rate hikes have slowed the rise in inflationary pressure, but not to a desirable extent. Members considered various scenarios of hold and hike and concluded that inflation could become more persistent in the medium term and thus pose more regulatory challenges if not effectively anchored.”

Nigeria’s inflation rate is currently 29.9 per cent and is expected to worsen in the short to medium term. Economic hardship in the country has worsened in the past months, leading to protests in several parts of Nigeria.

Recently, protests broke out in different parts of the country in reaction to the high cost of living with citizens in Niger, Kano, Kogi, Ondo, and other states demanding solutions to the economic crisis.

The Nigerian Labour Congress has also embarked on a peaceful protest in various parts of the country, lamenting the high cost of living.

But Cardoso responding to questions on how the CBN intends to tackle the country’s biting economic hardship, assured the public of his intent to restore confidence in the financial market.

He said, “As the central bank governor, I and my team are not responsible for the woes that we have today. We are part of the solution. We are determined to ensure that we work hard to get out of the mess that Nigeria is in. We assumed responsibility in a time of crisis of confidence. There was a crisis of confidence and you may all want to go to bed and wish that crisis of confidence was not there, but it was. And we can’t turn back the clock. All we can do is do the difficult things to make a bad situation better. And I do believe that the efforts that we are making are beginning to bring back confidence.

“We are now at the stage where we’re trying to rebuild and rebuild better and rebuild in a way that those who now come will see that they have something on the ground that is sustainable. No point in building something that will crash after a number of years. That’s not the idea. The idea is to put something in place. This. That will be able to outsurvive all of us.”

Private sector, economists

Meanwhile, members of the private sector and economists have faulted the MPC decision, saying it would lead to fresh job losses and possibly lead to recession.

Speaking in exclusive chats with The PUNCH, the economic experts and OPS members expressed concerns about the impact of the hike on the average Nigerian and the economy.

Chief Economist at SPM Professionals, Paul Alaje, said that while the measures might tackle inflation, they might not create respite for Nigerians.

He said, “The implications are not going to be as comfortable as we thought. Businesses that are funded by banks or businesses that are on bank loans will have to brace up for a major increase in bank rates that they will be receiving possibly from this week or next week from their respective financial institutions.

“The implication is that unemployment will increase. If businesses find it so hard to do business because of increasing bank rates as induced by high MPR and CRR, we have to brace for the challenges. Inflation is expected to go slowly. However, despite these adjustments, inflation will still grow. It might not be as sporadic as it is growing right now. Time will tell. What we are saying is that we have still not dealt with the cost-push inflation that is currently a major factor of the current inflation in Nigeria. And you know that inflation in Nigeria is driven by food inflation and imported inflation. The exchange rate is a major factor as well as prices of commodities.”

Also, a professor of Capital Market at the Nasarawa State University, Uche Uwaleke, said, “Jerking up the MPR by 400 basis points in one fell swoop is simply an overkill. Why not by not more than 200 basis points since they have another opportunity to meet next month and review the impact?

“They didn’t stop at MPR, they also jerked up the CRR to 45 per cent which at the previous level of 32.5 per cent was among the highest in Sub-Saharan Africa. The CBN governor had assured Nigerians that the policies of the bank would be evidence-based. Which empirical results support this aggressive move?”

“I pity the real sectors of the economy. The implication is that for every deposit in the bank, CRR takes 45 per cent of it while the Liquidity ratio takes 30 per cent. So it is only 25 per cent of the deposit that banks can lend! This has negative implications for access to credit, cost of capital for firms, cost of debt service by the government and asset quality of banks.

“Expect banks to quickly re-price their loans with negative consequences for non-performing loans and financial soundness indicators. By this overkill on the economy in a bid to crash elevated inflation which by the way has numerous non-monetary factors driving it, output is bound to shrink. So, expect lower GDP numbers, especially from agricultural and industry sectors as well as a surge in unemployment levels. This is not a welcome development.”

However, a former President of the Chartered Institute of Bankers of Nigeria, Okechukwu Unegbu, welcomed the rate hikes, saying it was a step in the right direction to curb inflation.

He said, “What the central bank wants to do is to control the level of cash in the system. What they want to do is reduce inflation in the economy because there have been disruptions. It’s to encourage people to reduce dependency on cash.

“What they have done is very effective. I think they have done the right thing with the appointments of the members of the MPC and they have hiked the MPR to control inflation. Making sure that the outflow of foreign currency is reduced. I think that’s their plan. Let us give it three months and see if it will work. There is too much cash flowing in the system, cash released during the time of (former president Muhammadu) Buhari and that was why I was not happy with the President (Bola Tinubu) when he floated the Naira. Before you float a currency, you must have strong reserves to back that currency. When the currency was floated. There was no reserve.”

However, a professor of Economics at Olabisi Onabanjo University, Sheriffdeen Tella, faulted the MPC decision.

He said, “I am surprised by the decision of the Central Bank of Nigeria to raise the interest rate after multiple warnings, but there must be reasons behind it. Contrary to my belief, I don’t think one of the motives is to control inflation. Inflation, in my opinion, is not a result of having too much money in the economy; rather, it stems from structural issues like the high exchange rate.”

The Director of Research and Strategy at Chapel Hill Denham, Tajudeen Ibrahim, said the hike in MPR would negatively impact the ability of businesses to borrow money from the banks for their various needs.

He, however, noted the hike would make treasury bills and bonds more attractive to foreign investors, whose investments could help to stabilise the naira.

He said, “It is negative for businesses as they will have to borrow at significantly higher interest rates from the bank. The CBN has no other tool to control inflation and address the volatility of the exchange rate except by increasing the exchange rate.”

On the new Cash Reserve Ratio, Tajudeen said, “The mechanism of calculating the CRR has changed somewhat. It is now based on an average weekly increase. So, when you have, for example, N400bn in deposits and it increases by an average of N20bn, the 45 per cent will be applied to the increase in N20bn.

“So the adoption of that incremental approach in debiting is what will make the impact less severe on the banks, compared to when they just applied it on their total deposits. It is negative, but it is needed to control the banks from speculating on the naira,” he added.

Also speaking, an economist at the Nigerian Economic Summit Group, Faith Iyoha said that the increase in the MPR would unlikely to tame inflation due to a disconnect between the MPR and the market interest rate.

According to her, the high cost of borrowing would have a ripple effect on the economy, including reduced productivity and possible job losses.

She said, “This kind of increase that we have seen, coupled with the existing depreciation of the naira, will lead to a very high increase in the cost of borrowing. The maximum lending rate now is about 30 per cent. It is likely to go as high as 35 per cent.

“This will have implication for growth, it will have implication on job losses. If manufacturers are unable to borrow because the rate is too high, it means we have limited investments for productivity.

“If productivity is low, it means those that are employing will not be able to employ. It means there will be a reduction in employment because the funds they can access are low. So, they would have to let some people go. There will be a decline in output and a decline in job creation. We will see more unemployment.”

Meanwhile, at a press briefing in Lagos on Tuesday, the President of the Manufacturers Association of Nigeria had said that poor access to credit from commercial banks had militated against the growth of the industry.

Meshioye called on the CBN to “mobilise commercial banks to intentionally provide long-term single-digit interest loans to the manufacturing sector to fast-track the actualisation of a one trillion dollar economy.”

On his part, the Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Muda Yusuf, said the increase in the Monetary Policy Rate and Cash Reserve Ratio poses a major risk to the financial intermediation role of banks in the Nigerian economy.

He added that the increase would constrain the capacity of banks to support economic growth and investment, especially in the real sector of the economy because the increases are quite significant.

Yusuf argued that although the decision was consistent with the typical policy response of the Central Banks globally, it failed to reckon with domestic peculiarities.

“We recognise that the primary mandate of the CBN is price stability, but numerous headwinds had posed significant risks to this critical objective. Some of these include the surge in commodity prices and impact on energy cost, disruptive effects of insecurity on agricultural output, and global supply chain disruptions.

“The surge in ways and means finance also makes the CBN a culprit in the inflation predicament over the past few years. The hike in MPR or CRR would not change these Variables,” he said.

Also, the Chief Executive Officer, Economic Associates, Ayo Teriba, said, “After six months of the Monetary Policy Committee not meeting, and inflation has gone up to a few decimal points below 30 per cent, and now the hike in the monetary policy rate.

“For you to observe the impact of the monetary policy rate on inflation, this increase might, depending on the transmission lag, begin to have a bite in March.”

According to him, the hike might begin to affect the price of goods in April, May or June of the year.

He added, “The key question is would this hike escalate inflation or lead to a decline. I know that their next meeting would be in a month in which the data they would be looking at would be the inflation data for February which would be totally unaffected following their decision today.”

Teriba asserted that this monetary policy rate hike was another increase in the cost of living, adding that it would impact negatively on inflation, the cost of living and the cost of borrowing.

He posited, “Traders and farmers would be affected by the hike in the MPL and the PRR, hence the short-term downside is certain but the upside for inflation is uncertain.

“This hike would increase hardship for the populace. However, the benefits are in terms of stabilising the exchange rate market, an immediate benefit on the liquidity of people in the foreign exchange market, and reduce the demand for forex which means continuation of the strengthening in naira, giving a higher cost of credit which would give a more stable exchange rate regime, leading to a positive inflation benefit, if the regime endures.” (The PUNCH)

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