Less than a week after the Monetary Policy Committee (MPC) of the Central Bank of Nigeria announced another increase in benchmark interest rate, the country’s newly sworn in president had stressed the need to bring down interest rates in the country.
Benchmark interest rate in the country had been raised to the highest so far in the country. Monetary Policy Rate (MPR) which is the benchmark interest rate has been raised from 18 per cent to 18.5 per cent, making it the seventh consecutive hike since last year.
Members of the committee had decided to continue on the hawkish stance as inflation continued to rise in the country, standing at 22.22 per cent as at April. The MPC members noted that with inflation driven by a combination of both demand and supply side issues, it had become expedient to continue to address the demand-side issues falling within the ambit of its policy tools.
In the communique read by the governor of the Central Bank of Nigeria, Godwin Emefiele, the committee said the decision to further tighten is to “support the efforts toward moderating the demand-pull inflation, as cost of funds increases, and discourages further build-up in aggregate demand, in the face of declining output growth.”
The MPC’s decision is to also to narrow the negative real interest rate gap and moderate the associated consequences, including discouraging domestic savings mobilization and waning investors’ confidence as inflation is currently 3.72 per cent higher than interest rate.
This means that the real interest rate is in the negative of 3.72 per cent. This suggests that the investment is not keeping up with the rate of inflation, resulting in a loss of purchasing power over time.
However, in his inauguration speech, newly- sworn in president of Nigeria, Bola Ahmed Tinubu, emphasised the need for interest rate to be reduced in the country.
According to him, monetary policy needs thorough housecleaning. Tinubu stressed that “interest rates need to be reduced to increase investment and consumer purchasing in ways that sustain the economy at a higher level.
Commenting on the stance of the president on rising interest rate, the chief executive of Center for Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, noted that the trend of CBN monetary policy over the last few years has being that of policy tightening aimed at taming inflation.
“This policy choice has failed to reckon with domestic peculiarities driving inflation. The key drivers of Nigeria inflation are supply side variables, not demand driven. The several hikes in over the years have not had any significant impact on the inflation. If anything, the general price level became even more elevated.
“We recognise that the primary mandate of the CBN is price stability, but numerous headwinds had posed significant risks to this critical objective. Some of these include the surge in commodity prices and impact on energy cost, disruptive effects of insecurity on agricultural output, and global supply chain disruptions. The hike in MPR would not change these variables.
“Already, bank lending has been constrained by the high CRR (many operators in the sector claim that effective CRR is as high as 50 per cent or more for many banks) , the discretionary debits by the apex bank and liquidity ratio of 30 per cent. Lending situation in the economy is already very tight.
“The Nigerian economy is not a credit driven or interest rate sensitive economy, unlike what obtains in many advanced economies which have much higher levels of financial inclusion, robust consumer credit framework and strong correlation between interest rate and aggregate demand. The level of financial inclusion in the Nigerian economy is still quite low, access to credit by households and MSMEs is still very challenging, and the informal sector accounts for close to 50 per cent of the economy.
“Private sector bank credit as a percentage of GDP is less than 20 per cent in Nigeria. It is over 10 per cent in South Africa and over 200 per cent in the United States. This underscores the variabilities across economies; thus, policy responses have to be different.
“The transmission effects of monetary policy on the economy are therefore still very weak. In the Nigerian context, price levels are not interest sensitive. Supply side issues are much more profound drivers of inflation.
“Persistent hike in MPR only means that the cost of credit to the few beneficiaries of the bank credits had continued to increase with impact on their operating costs, prices of their products and profit margins.”