The Monetary Policy Committee of the Central Bank of Nigeria raised the benchmark interest rate from 15.5 to 16.5 percent to contain inflation and maintain economic stability.
Speaking after a two-day meeting of the Monetary Policy Committee on Tuesday in Abuja, CBN Governor Godwin Emefiele said the committee had voted to raise the rate to 16.5% while retaining the asymmetric corridor of +100/-700 basis points. around the reference interest rate, also known as the monetary policy rate.
He said the MPC also voted to keep the cash reserve ratio at 32.5% and the liquidity ratio at 30%.
“The Committee’s choices were whether to raise rates further or take a break so that the impact of the last three rate hikes continued to ripple through the economy. In this MPC, the options considered were therefore mainly to maintain or further tighten the key rate. The option to ease was not considered as it would seriously undermine the gains from the last three rate hikes,” Emefiele said.
It was the fourth time the committee raised the benchmark interest rate since May, when the rate was cut from 11.5% to 13%. Since then, the rate has risen to 14% in July, 15.5% in September and 16.5% in November.
“At this meeting, the MPC expressed concern that global inflationary pressures continued to rise and that financial markets were also facing challenges. He observed that this was indeed the trend in Nigeria, with a inflation reaching 21.09% in October 2022,” he said.
Inflation rose from 15.92% in March to 21.09% in October, due to production costs, demand and external factors.
N5.1tn debt of manufacturers
Operators in the country’s manufacturing sector have seen their combined debts to Nigerian banks rise from N4.09 trillion in December 2021 to N5.1 trillion in September 2022, according to the sector analysis of depository bank credit. the CBN.
This showed that they borrowed the sum of N1.01tn between December 2021 and September 2022.
With debts rising, stakeholders argued that the current double digit lending rate was unfavorable as it had a direct impact on the cost of production and the competitiveness of the sector.
Members of the organized private sector and economists, however, reacted to the MPC’s interest rate hike, saying it would lead to production stoppages and an increase in bad debts.
The former president of the National Association of Small and Medium Enterprises, Mr Degun Agboade, said the association complained about the old rate before the current hike.
“We are in a worse situation. Nothing has improved in terms of infrastructure. In fact, the infrastructure is deteriorating. You cannot travel on roads; the price of diesel has gone up, and there are a lot of problems. In the midst of this, you still raised the interest rate? This is adding insult to injury.
A professor of economics at Covenant University, Ota, Jonathan Aremu, said the decision by CBN’s MPC reflected an economic theory that for an economy to remain robust, the amount of money in circulation must reflect the volume of production and consequently the volume of exchanges/transactions.
In a recent interview, Vice President of the Lagos Chamber of Commerce and Industry, Dr. Gabriel Idahosa, criticized the MPC rate hikes.
Idahosa said, “Our own economy can’t handle those kinds of rate hikes, where you have unemployment and inflation. Manufacturers are unable to afford current interest rates due to the cost of production. Diesel alone is sending many of them out of business. If you now add a high interest rate, it’s not good for businesses that are already suffering from these other problems of inflation and electricity supply. They’re supposed to do it on paper because monetary policy says if you have inflation, you have to raise interest rates.
In an interview with the punch, the chief executive of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, Sola Obadimu, said attempts to curb the excesses of inflation by raising the rate of monetary policy would lead to a dead end.
“I said that, increasing the monetary policy rate didn’t work. Since they decided to increase the MPR, has that brought inflation down? It hasn’t. And the manipulations of the monetary policy committee cannot bring inflation down.
“They’re trying to fight inflation, but they can’t. The naira is weakening so inflation will continue. There are also fears of the looming regularization of fuel prices. All of these things will have an impact on inflation. Rising interest rates did not prevent inflation from rising. This means that the commercial bank will now lend at an interest rate of 20-25%.
“I doubt a loan could be lower than that. This means that we will continue to experience this cost-push inflation due to the increased cost of your contribution. There is no way to sell at a lower price. This is normal and the cost of money is also one of the inputs. You take out a bank loan and there is the cost of servicing and repayment with principal and interest. These things can only make the situation worse. We must inject capital into the system and strengthen the infrastructure, it is not a daily job. So all these manipulations can only work in the short term.
The Director of International Relations and Public Sector of the Lagos Chamber of Commerce and Industry, Temitope Akintunde, said: “The interest rate hike is meant to curb inflation, but it will cause interest rates to rise. ‘interest. Many companies are already facing challenges, from the cost of production to the cost of doing business. So the increase in interest rates right now is also going to add to the many problems that people already have. The forex problem is also still present. This is something a lot of businesses struggle with. »
Akintunde said interest rate hikes may not curb inflation.
Also reacting, some economists warned the MPC that the decision to maintain an aggressive monetary tightening policy could have unintended consequences on the economy, warning that the rise in the MPR from 15.5% to 16.5% would increase unsecured loans. performers, mar the productive sector and weaken economic growth.
The Director General of the Center for Promoting Private Enterprise, Dr. Muda Yusuf, said the MPC needed to address supply-side issues to come up with a permanent solution to worsening inflation in the economy.
Furthermore, Economist and CEO of Cowry Assets Management Limited, Mr Johnson Chukwu, said: “This move by the MPC will cause economic activities to contract. If we continue on this trajectory (tightening of monetary policy), the cost of credit will increase and the cost of goods will increase. Simply put, the cost of credit will increase beyond the gross margin of businesses. Thus, banks will only lend to traders. We will close the productive sectors with this position. The question is: will this decision increase the volume of food produced? I think the decision can have very harsh unintended consequences.
He said with a higher MPR, businesses might not have enough to repay their loans.
Investors are abandoning stocks
A stock market analyst, Wole Samuel Adeyeye, said many equity investors were already pulling their money out of the stock market to take advantage of expected high yields on bonds and commercial paper, which are expected to rise.
A senior capital market analyst, Rasheed Yusuf, noted that the situation would make borrowing more expensive.
A stock analyst, David Adonri of HIGHCAP, said the rate hike was aimed at tightening the money supply in the economy.