Living in World of Rising Interest Rates
Obinna Chima writes on the rising inflation rates globally, which has forced central banks of many countries to hike their interest rates with the Central Bank of Nigeria following similar path.
Global geo-political risks have risen sharply since Russia’s invasion of Ukraine early this year. Clearly, the five-month war is exerting a drag on the global economy, as it has led to the surge in energy and food prices, currently driving galloping inflation rate and weighing on economic growth.
Owing to this, many countries including the United Kingdom, United States, South Africa, Ghana, India, among several others have all raised interest rates to fight rising inflation.
For instance, the United States Federal Reserve’s rate increase in June 2022, was the highest since 1994, and analysts are predicting that the Fed may raise interest rates again at its meeting on Wednesday. That would be the fourth rate increase in five months.
Similarly, the European Central Bank had last Thursday increased interest rates for the first time in 11 years, by pushing its benchmark rate up by 50 basis points, in an attempt to cool rampant inflation in the euro zone.
In the same vein, in South Africa, the central bank raised its benchmark interest rate by three-quarters of a percentage point to 5.5 percent last Thursday, the highest in a decade. The move was the fourth rate hike in a row, as the South African Reserve Bank voiced concerns over high inflation and weak economic growth.
Ghana’s central bank had also raised its main interest rate by 200 basis points to 19 per cent to control inflationary pressures, just as India’s central bank had raised its key interest rate to 4.9 per cent, also to contain inflation.
Generally, it is expected that higher interest rates would affect cost of borrowing for banks, which is then passed onto businesses, consumers and households. But it is also anticipated that higher borrowing costs would eventually slow borrowing and economic activity, which would ultimately slow inflation.
The Nigeria Situation
In Nigeria, the Central Bank of (CBN) also toed the same path last week, as it raised the benchmark Monetary Policy Rate (MPR) by 100 basis points from 13 per cent to 14 per cent, citing rising inflationary pressure across the world. The development came exactly two months after the committee had at its last meeting held in May, raised the MPR by 150 basis points from the 11.5 per cent it was, previously.
Inflation in Nigeria climbed to 18.6 per cent in June.
CBN Governor and Chairman of the MPC, Mr. Godwin Emefiele, had warned that the MPC would continue to raise benchmark interest rates as long as inflationary pressure continued.
Emefiele explained that the decision to raise the MPR was reached due to MPC members’ concerns about rising inflation, which had risen to 18.6 per cent in June, 2022.
He said “MPC noted with concern the continued aggressive movement in inflation even after the rate hike in the last meeting and expressed its unrelenting resolve to restore price stability while providing the necessary support to strengthen our fragile economy.
“As regards the decision whether to tighten or hold, the committee was unanimous and so did not consider both loosening and retaining rates at existing levels at this meeting.
“On loosening, the MPC felt it would worsen the existing liquidity conditions in the economy and further dampen the money market rate necessary to stimulate savings and investments. Members also felt that loosening would trigger the weakening of the exchange rate, which could pass through to domestic prices.
“MPC did not also consider holding because it suggests that the bank is not responding to both global and domestic price development as inflation numbers continue to trend upwards.”
The CBN governor noted that on tightening, members of the MPC were unanimous that given the aggressive increase in inflation, coupled with the resultant negative consequences, particularly on the purchasing power of the poor, as well as retarding growth, there was need to continue to tighten monetary policy.
According to him, the policy dilemma was hinged around the level of tightening needed for inflation without dampening manufacturing output, which could result in a higher cost of borrowing.
Emefiele explained, “So, essentially, with what we are doing in terms of development finance, we need to do a lot more work to rein in inflation. MPC did not even take any look at the issue of whether to hold rate constant or to loosen it.
“Some analysts say we should not continue to increase rates because we have increased cost of borrowing for the borrowers and that it may also weaken manufacturing output. We agree with that postulation
“The important thing is that, as long as we see inflation at the level that can retard growth, it must be dealt with while at the same time we are looking at how to use our development finance tools to continue to push towards improved output growth.
“That is what we’re doing. The MPC is very determined that if inflation continues at this rate, particularly aggressively, we will continue to tighten because that is the only thing that I can say at this time.”
While pointing out that inflation could be a terrible scourge, he said it was capable of totally obliterating citizens’ purchasing power, particularly the weak, vulnerable and the poor.
“By the time it weakens the purchasing power of the vulnerable, naturally, it will also lead to heightened unemployment and will ultimately retard growth. We have to be very careful about the rate of acceleration of pricing or inflation. It is a very serious matter to the policy committee because as inflation continues to trend higher, it would no doubt adversely begin to retard growth,” he added.
Analysts React on Rate Hike
The Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, said there was nothing Nigeria could do to alter the Ukraine – Russia War and the resultant international price of wheat or energy price.
Rewane said, “The things you can do are the things within your reach, which are your interest rate movement and the structure of your interest rate. When the MPC increased interest rate by 150 basis points the last time, what happened to the general level of interest rate in Nigeria? It remained flat.
“If you look at every other market like Ghana, Kenya, the policy rate is always lower than the one-year treasury rate. In our case, the treasury bills rate for three months is 3.7 per cent, one-year about seven per cent, while inflation is about 18.6 per cent and policy rate at 14 per cent. So, the MPR is double the one-year treasury bills rate.”
While noting the rising cost of diesel and exchange rate depreciation as drivers of inflation, Rewane argued that interest rate hike would not be enough to tame inflation.
“Interest rate is a limited tool to deal with surprise shocks, so it will go a long way, but it is not a silver bullet,” he added.
Managing Director/Chief Economist, Africa and Middle East Global Research, Standard Chartered Bank, Razia Khan, opined that she expected that inflation in Nigeria would continue to rise until the rates in the various forex markets harmonises.
“In the absence of forex policy moves, the read on monetary policy intentions becomes more difficult. However, we think that in tightening now, the CBN is reacting both to current pressures, as well as potentially preparing the ground for eventual (maybe post-election) FX policy reforms,” Khan added.
Lending his voice, Managing Director, Optimus by Afrinvest, Mr. Ayodeji Ebo, noted that high inflation in the country was due to structural issues such as insecurity.
He urged the federal government to tackle insecurity in order to boost food production as well as provide necessary infrastructure.
On its part, the Lagos Chamber of Commerce and Industry (LCCI), stated that the CBN MPR hike alone would not yield the desired result of lowering inflation.
Director General, LCCI, Chinyere Almona, stressed the need for a corresponding boost to supply-side factors of inflation to accompany the monetary policy instruments by the apex bank in order to tackle inflation.
She said supply-side factors like forex scarcity, insecurity, rising costs of fuels and weak infrastructural support for production must be addressed.
However, Almona admitted that CBN’s rate hike was seen to be a necessary option considering that many other economies were raising rates for the same reason of taming inflation.
According to her, a comparatively low-interest rate could make the country’s portfolio assets less attractive to asset buyers and offshore investors.
“We note the gloomy outlook of the global economy, which has a direct link to our domestic economy with pass-through effects of imports. The persistent war in Ukraine and other disruptive factors may present as risks into the end of the year.
“Tightening of rates may have been a good decision by the MPC as that was necessary to tame the rising inflation rates in the past months,” she added.
The LCCI boss, however, urged the CBN to maintain its targeted intervention schemes for agriculture, manufacturing, industries, energy, infrastructure, healthcare, exports, and Micro, Small, Medium Enterprises (MSMEs).
“While it is expedient to curb inflation rates, we equally risk a contracted economy that may go toward a recession,” she added.
In his intervention, the Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, said, “lending situation in the economy is already very tight. The new MPR hike means that the cost of credit to the few beneficiaries of the bank credits will increase, which will impact their operating costs, prices of their products and profit margins. The equities market may be adversely impacted by the hike.”
