By Francis Ajuonuma
The Central Bank of Nigeria (CBN) has announced a significant increase in interest rate by 150 basis points, raising it from 24.75 to 26.25 per cent amid rising food inflation.
This decision was made by the bank’s Monetary Policy Committee (MPC) during their two-day meeting.
The primary objective behind this move is to the country’s stubbornly high inflation levels, which stood at a staggering 33 per cent in April 2024.
However, there are fears that the increment would further exacerbate the economic hardship already faced by Nigerians.
Higher interest rates in Nigeria could have the following effects on the economy.
They include higher borrowing costs for businesses and individuals, which can reduce spending and investment; reduced consumer spending and consumption, as borrowing becomes more expensive; and increased cost of production for businesses, which can lead to higher prices and reduced demand.
Others include reduced economic growth by reducing spending, investment, and consumption; increased unemployment, as businesses may reduce staff to cut costs; reduced access to credit for individuals and businesses, which can limit economic activity, increased inequality as those who have access to credit may be able to take advantage of lower interest rates, while those who do not have access to credit may be forced to pay higher interest rates, among others.
Speaking at the MPC meeting, CBN Governor, Dr Yemi Card, who also serves as the chairman of the committee, stated that this decision was based on a careful review of recent and financial developments and an assessment of potential risks to the country’s economic outlook.
In addition to increasing the Monetary Policy Rate, which now stands at 26.25%, other policy measures remained unchanged.
The Cash Reserve Ratio (CRR) for Deposit Money Banks (DMBs) was retained at its current level of 45%, while the asymmetrical corridor around the MPR was set at +100 and -300 basis points. The liquidity ratio also remained steady at 30%.
Cardoso acknowledged that rising inflation levels are primarily fuelled by food inflation, with factors such as escalating transportation costs, infrastructure challenges insecurity issues, and exchange rate fluctuations contributing to these persistent price pressures.
This announcement comes amidst soaring commodity prices and a rising cost of living in Nigeria.
The removal of fuel subsidies last year and fluctuations in currency value have contributed to historic high inflation levels in recent times.
Despite protests and pressure from labour unions, President Bola Tinubu has urged patience from Nigerians while expressing confidence that government reforms will yield positive results.
To address currency devaluation concerns, CBN has taken measures against cryptocurrency exchange Binance in recent months which led to an appreciation of the naira.
However, these gains have stalled recently as challenges persist.
Hike will hurt real sector investment, says Centre for Promotion of Private Enterprise
The Centre for the Promotion of Private Enterprise (CPPE) has expressed concerns about the rate hike by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN).
Chief Executive Officer (CEO) of CPPE, Dr Muda Yusuf, said this in a statement yesterday in Lagos, while responding to the outcome of the MPC meeting, held Monday and Tuesday in Abuja.
Yusuf said that the rate hike might have a negative impact on the real sector and investments, leading to increased hardship for businesses.
The Central Bank of Nigeria had yesterday at it MPC meeting raised the country’s baseline interest rate by 150 basis points to 26.25 per cent from 24.75 per cent, but decided to hold all other parameters constant.
The Cash Reserve Ratio (CRR) was thus, retained at 45 per cent, the Liquidity Ratio of 30 per cent was retained and Asymmetric Corridor of +100/-300 basis points around the MPR was also retained.
“We have seen yet a further tightening of monetary conditions in the economy. My prayer was for the MPC to pause the rate hikes for a number of reasons.
“First, previous rate hikes have been quite aggressive, hurting output and real sector investments. Most economic operators with credit exposures to the banks have not recovered from previous hikes,” said the CPPE boss.
“Interest rates were already around 30 per cent threshold. Secondly, extant CRR of 45 per cent has profound liquidity effects on the financial system.
“Both measures have dampening effects on financial intermediation, which is the primary role of banks in an economy.
“Thirdly, the monetary policy transmission channels are still very weak, given the level of financial inclusion in the economy. This limits the prospects of monetary policy effectiveness,” he said.
According to him, the new rate hike is an additional cross to be borne by investors who have exposures to bank credit facilities.
“Naturally, a rigid monetarist disposition by the Central Bank is expected. But we need to reckon with the costs to the economy.
“Hopefully, with the positive outlook for domestic refining of petroleum products, we may begin to see a moderation in energy cost and a pass through effect on general price level.
“This is one silver lining that is on the horizon at the moment.
“Necessary fiscal policy support are urgently needed to compensate for the adverse impact of extreme monetarism on the economy,” Yusuf said. (Source: NAN)
