The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) yesterday increased the primary lending rate by 100 basis points (1%), from 16.5 to 17.5%, contrary to analyst expectations.
The committee cited the state of the economy in the face of high inflation as the reason for its continued hawkish stance.
The MPC was of the view that although the inflation rate moderated marginally in December, the economy remained confronted with the risk of high inflation with adverse consequences on the general standard of living. The Committee, therefore, decided to sustain the current stance of policy at this point in time to further rein in inflation.
While the monetary authority claims that the move is intended to reduce inflation, economists believe it will have the opposite effect.
Interest rate increases in response to high inflation are a common monetary policy tool used by central banks to help control inflation. The idea is that raising interest rates makes borrowing money more expensive for individuals and businesses, which can lead to a decrease in spending and investment and, ultimately, slow the rate of inflation.
Raising interest rates, on the other hand, can have negative consequences such as slowing economic growth, making it more expensive for businesses to borrow money, and making it more difficult for consumers to access credit. These negative effects may make the country less appealing to foreign investors while also making domestic businesses less stable.
Dr. Charles Igboga, a lecturer in economics at Bayero University, believes the interest rate increase will affect the cost of doing business and, as a result, the rate of inflation. He predicted that commercial bank customers’ interest rates would rise above current levels.
What it means is that the lending rate will rise henceforth. This will naturally increase inflation because it will drastically affect the cost of production, and there’s no way any enterprise will sell below production cost. The CBN is hoping that increasing the primary rate will help to reduce inflation, but on the contrary, it always leads to inflation, he said.
The quest to reduce inflation is a conundrum for the central bank, as raising interest rates to achieve moderation may also slow the country’s GDP growth rate.
According to Moses Kemakolam, an economist, the CBN’s rate hike will harm the productive sector and, by extension, the overall economy. He stated that previous decisions by the apex bank to raise interest rates had not resulted in meaningful results.
The MPC believes that consistent increases in the interest rate caused the slight easing of inflation in December 2022 and that further increases will stem inflation in January and after. However, the reality is that continuous increases in interest rate will stifle the productive sector and cause a default on loan facilities’ repayment due to factors like an insufficient supply of energy.
Insecurity and other rising production costs have affected most companies’ profitability. This interest rate hike would also limit the capacity of the industrial sector to take more loans for expansion.
The economy is already challenged in 2023 due to election anxiety and possible inactivity of the incoming government to save the economy through the year. The CBN’s increased rates will further hurt the economy in 2023, he said.
Despite these concerns, the central bank is unlikely to budge because it considers inflation to be a far greater problem than the consequences of a temporary increase in inflation rates, regardless of the effects on ordinary Nigerians.
For example, most businesses have resorted to shrinkflation, which is the practice of selling the same item at a higher or equal price but in smaller quantities.
Others have introduced sachetization, which is the sale of products that would normally be sold in larger packaging but are now sold in sachets. These actions make life even more difficult for ordinary Nigerians, who bear the brunt of monetary policies as final consumers.
Dr. Biodun Adedipe, the founder and CEO of B. Adedipe Associates Limited (BAA Consult), recently stated that interest rate changes will be a never-ending cycle that will impoverish corporations and households.
If the interest rate is escalated, as is the case now, it means the cost of funding will be high, which will be passed on to consumers, increasing the prices of goods and services.
Dr. Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, CPPE, also reacted, saying the CBN’s increase in MPR from 16.5% to 17.5% would hurt real-economy investors.
He stated that the implication is that lending rates for bank-indebted investors will rise, and that the rise will imply an increase in operating and production costs, which will have a negative impact on economic growth.
Small businesses would face increased difficulties in obtaining and paying for credit.
But do monetary policy actions have a real impact on Nigeria’s inflation rate? Is there anything the Fed can do to lower interest rates?
Nigeria’s inflationary challenges have historically been supply-side rather than demand-side, implying that the problem extends beyond rate hikes.
For example, the central bank cannot use rate increases to mitigate the effects of fuel scarcity, insecurity, logistics challenges, and so on.
According to Ben Atuma, an economist and social affairs analyst, tightening monetary policy has little effect on inflation. He stated that Nigeria’s economy is not based on credit.
He stated that exchange rate depreciation, foreign exchange market illiquidity, insecurity, high energy costs, particularly diesel, climate change, and the massive injection of liquidity into the economy through controversial methods and means of financing are key drivers of inflation.
Last week, Naijaonpoint reported that experts warned that raising interest rates above 16.5% could jolt the economy, with serious consequences for the manufacturing and banking sectors in particular.
As a sign of progress, the apex bank will point to a lower year-on-year inflation rate in December.
Members welcomed the recent deceleration in year-on-year headline inflation, noting that the persistence in policy rate hikes over the last few meetings of the Committee had started to yield the expected decline in inflation. The Committee thus deliberated on either to hike rates further or hold for the impact of the last four rate hikes to continue to feed through.
But could this be the start of a new forex policy? Reuters News Agency quoted Razia Khan, Standard Chartered managing director, and chief economist for Africa and the Middle East, as saying in response to the CBN’s rate hike,
Our immediate read on this is that the CBN is showing more anti-inflation resolve, and preparing the way – perhaps – for an eventual FX policy liberalization that will require a reset to higher market rates.
