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Experts Fume as CBN Raises Interest Rates to 26.75%

July 23, 2024

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Experts have said the persistent increase in the interest rate by the Central Bank of Nigeria (CBN) has not achieved the desired result and there has become unnecessary. The Central Bank of Nigeria (CBN) on Tuesday again raised the Monetary Policy Rate (MPR), which measures interest rates by 50 basis points, from 26.25 per cent to 26.75 per cent amid soaring inflation and skyrocketing food prices.

CBN Governor, Olayemi Cardoso, announced this after the apex bank’s 296th Monetary Policy Committee (MPC) meeting in Abuja.

The MPC adjusted the asymmetric corridor around the MPR from +100 to -300 to +500 to -100 basis points.

The MPC also retained the Cash Reserve Ratio (CRR) of deposit money banks at 45 per cent and merchant banks at 14 per cent and retained the Liquidity Ratio at 30 percent.

Cardoso said the committee was mindful of the effect of rising prices on households and businesses and expressed its resolve to take necessary measures to bring inflation under control.

He said despite the June 2024 uptick in inflation, prices are expected to moderate in the near term as monetary policy gaining further traction in addition to further measurers by the fiscal authority to address food inflation.

The MPC worried that food inflation and rising energy costs continued to undermine price stability.

He announced September 23 and 24 as the next meeting of the MPC.

Nigeria is battling one of its worst economic crises in recent times, with rising living and energy costs, sparked by the twin-policies of the government’s removal of petrol subsidy and unification of the foreign exchange winders in May 2023.

The country’s inflation reached an all-time high in June, hitting 34.19 per cent, according to the latest data from the National Bureau of State Statistics (NBS).

Food inflation also rose in June 2024 to 40.87 per cent year-on-year compared to 40.66 per cent recorded in May 2024, 15.62 per cent higher than the 25.25 per recorded in June 2023.

The President Bola Tinubu administration alongside governors in the 36 states have since rolled out a number of palliative measures but Nigerians continue to lamentably hurt with the severe impact of inflation as the prices of food commodities and basic products multiply uncontrollably.

However, some economists who were reacting to the outcome of the Monetary Policy Committee (MPC), meeting which raised the Monetary Policy Rate (MPR) meeting said it is wrong to be doing the same thing and be expecting a different result.

Since the beginning of the year, the MPC has raised the MPR by 650 basis points bringing the rate to 26.25 per cent as of May.

However, within the period, inflation has maintained upwards trajectory, moving from 29.90 per cent in January to 33.95 in June 2024, an increase of 4.05 per cent.

Professor Godwin Oyedokun of Lead City University, Ibadan said the government needs to address the fundamental issues causing inflation, adding that using only Monetary policy instrument to check inflation will not work.

He noted that the more they increase the interest rate, the more it is difficult for businesses to access funds to do business.

According to him, “If a businessman borrows at a high interest rate to produce, he will most definitely pass on the extra cost on the consumers, which invariably increases the price of the goods.”

On his part, Professor Uche Uwaleke, of Nasarawa State University, Keffi, said, “Having done 750 basis points between February and May this year, I had predicted they would do a minimum of 50bps or a max of 100bps in July.

“I am glad to note that they chose the floor which is a sign that a complete halt is most likely in their next scheduled meeting in September.

“But the adjustment to the asymmetric corridor around the MPR is a major source of concern for me.”

He said the MPC communique did not provide any explanation for increasing the SLR from +100 to +500 and the SDR from -300 to -100.

“By implication,” he said, “with an MPR of 26.75 per cent, banks will now get loans from the CBN at 31.75 per cent while they will be remunerated for their excess deposits at 25.75 per cent. This will further squeeze liquidity from the banking system and jerk up cost of credit with adverse consequences on output and the equities market.

“The MPC communique should have made it clear why it was better to mask the tightening in the asymmetric corridor than reveal it in the MPR.

“May I observe that unlike previous MPC communiques, recent ones are silent regarding how the members voted. This information is useful at this stage even before their personal statements are published.

“I submit that as far as taming the current elevated inflation in Nigeria is concerned in view of its major non-monetary drivers, the fiscal side holds the ace.”

The National President of the Nigerian Association of Chambers of Commerce Industry Mines and Agriculture (MACIMA), Dele Oye Eaq. had earlier in a statement raised the alarm that further increase in the interest rates introduces higher costs and increases uncertainty for businesses which can have a range of negative impacts on their operations and growth prospects.

He said some of the consequences include increased cost of borrowing and reduced investment as well as decreased consumer spending which impact cash flow.

The Chief Executive Officer of the Centres for the Promotion of Private Enterprises (CPPE), Dr. Muda Yusuf had also advised the MPC to keep the MPR low.

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