Economists Weigh Pros and Cons of Interest Rate Hike by MPC

Finance  Pgs

While Nigerians are waiting for the implementation of the increase in the interest rate and other decisions taken by the Central Bank’s Monetary Policy Committee at its last week’s meeting, economic analysts are divided over the capacity of the rate hike to bring the desired succour to Nigerians, especially with the current level of hardship, reports Festus Akanbi  

Given the level of anxiety over the nation’s economy in the run-up to last week’s meeting of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC), there were expectations that the committee would maintain a hold position on the interest rates although a few economic watchers predicted a slight increase in the Monetary Policy Rate (MPR).

This is because there was a rise in inflationary pressures to 22.79% y/y in June (May: 22.41% y/y), driven by moderate increases in food and core inflation. Other factors that stoke upward price pressures in the near term include upward adjustments to petrol prices in line with market realities and the lingering foreign exchange market reforms.

However, citing key policy reviews particularly the recent deregulation of petrol prices and transition to a unified and market-determined exchange rate – with the attendant inflationary concerns, the CBN’s MPC, resolved to increase the MPR, also known as the benchmark interest rate by 25 basis points to 18.75 per cent from 18.5 per cent.

The MPC also adjusted the asymmetric corridor around the MPR to +100/-300 from +100/-700 and retained the Cash Reserve Requirement (CRR) at 32.5 per cent as well as the Liquidity Ratio at 30 per cent.

The CBN acting Governor, Mr Folashodun Shonubi, said the modest increase in the benchmark interest rate was targeted at curtailing a potential uptick in inflationary pressures resulting from the policy changes.

Pressure to Halt Rate Hike

Expectedly, the MPC decisions have been subjected to reviews by ordinary Nigerians and economic analysts who want to know the implications of raising interest rates at a time like this. The question is: how will the CBN’s decisions help the Nigerian economy at a time like this, especially with the current level of hardship?

Analysts observed that the voting patterns among the MPC members suggested the realisation of the near futility of increasing interest rates. According to analysts from Cordros Capital, “The voting range was narrow among members, suggesting a likely pressure on the committee to halt their interest rate increases in the near term. Precisely, six members voted for an increase in the MPR, while the remaining five voted to keep the MPR unchanged. Of the six members that voted for an increase, four voted to raise the MPR by 25bps, while two voted for a 50bps hike.”

Cordros Capital, in its reaction to the MPC’s decision, said critical considerations at the meeting were to either keep the MPR steady or continue increasing it to tame the rise in consumer prices. It added that the MPC opted for a moderate increase in the key policy rate to (1) sustain its efforts at anchoring inflation expectations, (2) narrow the negative real interest rate gap, and (3) improve investors’ confidence. 

The report said the committee’s tone suggests that the CBN hopes to rely more on diaspora remittances to boost FX inflows even as the country awaits foreign capital to improve due to the sharp depreciation that accompanied the CBN’s recent FX liberalisation, saying “Consequently, we anticipate FX pressures to remain in the near term as diaspora remittances may not be sufficient to support FX supply.”

 In his response to THISDAY inquiries, the Group Executive Director of Cordros Capital, Olufemi Ademola doubted the potency of the rate increase to bring the desired change in the financial system. Hence, it does look like the increase in MPR may not achieve the intended objective of curbing inflation but may rather worsen the situation as financial cost increases with attendance general increase in prices although he agreed that the popular expectation was a rate increase. 

 According to him, the Monetary Policy Committee’s (MPC) decision is not totally unexpected. He said the combination of high inflation and liquidity surfeit effects will theoretically require monetary tightening to manage, saying however that whether it is the best decision is not easy to determine. 

He said: “This is also quite clear from the committee considerations which stated that “legacy headwinds, including security challenges in major food-producing areas; high cost of transportation driven by the rising cost of energy; and inadequacies in public infrastructure, continue to drive the rise in food and core inflation. This would necessarily infer that the problem of inflation in Nigeria is structural, rather than monetary and thus, should require more of a fiscal response than monetary.”

The development, according to him, also showed in the voting pattern of the committee where only six of the 11 members voted for a rate hike while five voted for “hold”. It was clearly a hotly debated issue at the meeting.

“Be that as it may, the outcome is not unexpected as it is the appropriate theoretical reaction to the price developments in the country. So, I expect that the economy will adjust accordingly,” he stated.  

An economist and Standard Chartered Bank’s Head of Research, Africa and Middle East, Razia Khan, who shared her thoughts on the MPC’s decisions last week, said the latest measures appear modest versus the magnitude of inflation challenges that Nigeria faces, the reference to the use of ‘other tools in the toolbox’ to curb inflation will be of greater interest.

On the measures put in place to boost the foreign exchange market, Khan stated that “Increased supply of FX to the official market (a ‘market’ – not the ‘I&E window’) would also go some way towards stabilising prices.  While this appears to be the intent of the authorities, faster action is needed now to safeguard the FX market liberalisation measures already announced.

“Near term, interest rate policy matters a little less than the supply of FX liquidity to the fledgling, recently liberalised, market.  If the FX liberalisation is to succeed, the clear call is for more FX supply – from the CBN as well as other, ‘autonomous’ sources.”

On his part, the Director/Founder, The Centre for the Promotion of Private Enterprise, Dr. Muda Yusuf, explained that the hike in MPR did not come as a surprise because of the surging inflation and the current pressure on the exchange rate, adding that these are macroeconomic conditions that the CBN would not ignore.

He noted that there are concerns about the real interest rate which is currently in negative territory and that there are also worries about the signalling effect of the MPC decision. 

Yusuf, who was also a former Director General of the Lagos Chamber of Commerce of Industry (LCCI) warned that “the hike in rate would hurt investors in the real economy as they are already grappling with numerous headwinds. These include the spiking energy cost, depreciating exchange rate, increasing cost of logistics, weak purchasing power, and spiralling inflation. 

“The main drivers of inflation at this time are the twin problems of rising energy costs and the depreciating exchange rate.”

Contrary to the position of the MPC committee, Yusuf maintained that the increase in MPR is unlikely to significantly impact inflation given the fact that the transmission mechanism of monetary policy instruments on inflation is extremely weak because of the peculiarities of the Nigerian economy.