MPC Member Warns Aggressive Monetary Tightening May Further Depress Economy

James Emejo in Abuja

A member of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), Philip Ikeazor, has expressed concerns that a consecutive aggressive monetary policy tightening would further depress the economy.

He stated this in his Personal Statement at the MPC meeting held on March 25 – 26, 2024.

Ikeazor, who voted to raise the Monetary Policy Rate (MPR) by 150-basis points from 22.75 per cent to 24.25 per cent, specifically expressed worry over the imbalance between the exposure of the oil and manufacturing sectors, highlighting their poor contribution to growth.

He said even as non-performing loans (NPLs) continued to rise, and considering the vulnerability of the manufacturing and oil sectors to rate hikes, “consecutive aggressive tightening will further depress the economy”.

During its last meeting in March, the CBN had resolved to further increase the benchmark interest rate by 200 basis points to 24.75 per cent from 22.75 per cent. The bank also reversed the asymmetric corridor around the MPR from +100/-700 basis points to +100/-300 basis points.

The apex bank also retained the Cash Reserve Ratio (CRR) of Deposit Money Banks (DMBs) at 45.0 per cent, and jerked up the CRR of Merchant Banks (MBs) from 10 per cent to 14 per cent, and left the Liquidity Ratio (LR) unchanged at 30.0 per cent.

However, Ikeazor said, “The pressure point is already manifesting as indicated in the projected contraction of PMI in the industrial sector by 7.1 index points occasioned by rising input cost and low-capacity utilization.”

He noted that as the various economic reforms implemented by the federal government continue to yield results, economic growth will be sustained in 2024 and boosted in 2025.

He added that further harmony of fiscal and monetary policies was critical for achieving a non-inflationary growth and stable macroeconomic environment.

The MPC member also stressed the importance of distilling the drivers of price, including inflation, exchange rate, and interest rate, before deciding on the appropriate instruments and in what proportions to adjust the instruments to address the current inflationary and exchange rate pressures.

He said, “Accordingly, statistics and contextual analysis identified two related pass-throughs as key drivers of headline inflation: imported food and the psychology of seller’s inflation. The seller’s inflation pass-through reflects the use of the exchange rate at the time of purchase of current stock of inventory as a guide to mark-up for domestic market prices, despite a real-time appreciation in the exchange rate.

“This psychology further extends to the price of commodities which are foreign exchange-neutral or not affected by the dynamics in the exchange rate. To this end, I am inclined to support an increase in the policy rate this time, partly to attract the projected capital inflow of the $200.0 billion in emerging markets to Nigeria while being mindful of the crowding out effect of the foreign portfolio inflow on domestic investors and its associated volatility.

“In addition, the asymmetric corridor in its present form is distortionary and does not anchor the interbank market thereby necessitating contractions of the corridor to make it more responsive. However, the tweaking of the corridor, especially its ceiling (upper bound), should be modest to allow banks the flexibility to meet their overnight reserve targets without creating an oligopolistic market that allows the bigger banks to control the market.”

He said, “Whereas the settlement of the backlog of valid FX transactions and clearing of $7.0 billion in claims has helped stabilize the market and improved transparency in the operations, projections show that market volatility may persist in the short term. The combined effects of the policy rate and the adjustment of the asymmetric corridor (through the operating target) are meant to moderate volatility and address the inflationary pressure through the exchange rate channel.”

“Given the estimated 62.0 per cent association between the overnight interest rate and the exchange rate, the contractionary effect of the policy rate and the corridor will simultaneously increase liquidity in the foreign exchange market and moderate liquidity in the money market.

“Consequently, the envisaged naira appreciation from the contractionary stance will increase the value of net foreign assets with a corresponding decrease in reserve money due to the FX effect on the revaluation of foreign liabilities and the consequent decline in risk premium,” he said.