Businesses face crunch, CBN raises rate to 15.5%

•It’s a panic measure, NACCIMA, others
•Rate hike’ll worsen cost of capital – Economists
•CBN eyes liquidity mop-up on Thursday

In consideration of the galloping global and local inflationary levels, the Monetary Policy Committee of the Central Bank of Nigeria, on Tuesday, raised the benchmark interest rate from 14 to 15.5 per cent.

This represents a 150-basis-point increase from the 14 per cent rate voted during the last MPC meeting in July.

This is the third time the apex bank would be raising the Monetary Policy Rate, which is the same as the benchmark interest rate, in five months.

The MPC had raised the rate from 11.5 to 13 per cent in May, and further to 14 per cent in July, before increasing it to 15.5 per cent in a latest blow on cash-strapped Nigerian business, especially small and medium enterprises.

At the end of the MPC meeting, CBN Governor, Godwin Emefiele, told journalists that 10 members voted in favour of the rate hike.

The cash reserve ratio (CRR), which means the share of a bank’s total customer deposit kept with the central bank as cash, was also raised to 32.5 percent, from 27.5 percent since July.

Emefiele announced these decisions after the MPC meeting, saying  that members were concerned with the continued aggressive movement in inflation, “even after the rate hike at its meeting in May and July 2022, and expressed an unrelenting resolve to restore price stability while providing the necessary support to strengthen the fragile recovery.”

“We will keep increasing the interest rate to reduce the high effect of inflation,” Emefiele said, noting that “the tested monetary policy theory is that the easiest way to tame inflationary pressure is to raise rates.”

He explained that the MPC was of the view that with the aggressive policy normalisation of the economies, losing the policy stance could hurt the economy.

“CBN research study has shown that once inflation trends above 12.5 or 13 per cent, it will retard growth. So, it is difficult for us, with all data available, not to go in a very aggressive way. To some, this is not expected because it increases the cost of borrowing, but this is the best we can.”

“At this meeting, the option of reducing the policy rate was not considered as this would be gravely detrimental to reigning in inflation. The committee thus agreed unanimously to raise the policy rate to narrow the interest rate gap and rein in inflation. The committee thus voted unanimously to raise the MPR.”

CBN to mop up liquidity

Emefiele further said that the CBN would  implement aggressive cash reserve requirement measures to mop up excess liquidity from commercial banks by Thursday.

He cautioned banks to fund their accounts immediately, warning that lenders which failed to fund their bank accounts would be denied access to the foreign exchange market.

Experts believe that the measure is meant to tame inflation and arrest the currency crisis.

Naira exchanged at N718/$ on Tuesday at the parallel market and has hovered between N420/$ and N435/$ at the NAFEX window in the last one month.

CBN not compelled to fund airlines

The governor further said the CBN was not compelled by any law to provide dollars to airlines.

He said the CBN was determined to clear the foreign exchange backlog owed to airlines as long as their banks were fully funded, noting, however, that it was not the CBN’s responsibility to provide dollars to foreign airlines.

Emefiele said the bilateral air service agreements “did not say that you have to repatriate all of your dollars through the central bank. There is no law that makes it compulsory for you to purchase dollars from the Central Bank.”

It’s a panic measure – NACCIMA, others

The Director-General of the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture, Olusola Obadimu, described the rate hike as “a panic measure.”

“It is a pure panic measure. They might think that by raising interest rates, investors would be attracted to remain and others to come in and invest.

“However, an economy such as ours that is heavily import-dependent, experiencing stagflation and risking recession would not likely stand a chance.”

He said Nigeria must remain committed to its debt servicing obligations and control an appetite for more loans, particularly those taken to finance non-developmental efforts – both at the federal and the state levels.

He noted that the Federal Government must incentivise companies sourcing their raw materials locally.

“Additionally, we urgently need to promote exports, harmonise the exchange rates and encourage import substitution.

Deputy-President of the Lagos Chamber of Commerce, Mr Gabriel Idahosa, said the CBN had to increase the MPR in an effort to stem the rising inflation rate that had crossed the 20 per cent mark.

“The economy now threatens to slide into runaway inflation – which is uncontrollable in the short term. This sharp rise in MPR may help to slow down the inflation if it is supported by significant efforts to reduce the production costs of goods and services,” he noted.

He said inflation in Nigeria was largely the cost-push type, caused by rising cost of production inputs, including diesel and raw materials.

Former President, Nigerian Association of Small Scale Industrialists, Segun Kuti-George, said what the government was trying to do with the rate hike was simply to attract more investments and reduce inflation.

“That is, more people will be putting their money in banks in fixed deposits. But they are looking at one side of the coin. In economics, whenever you are taking an action, you must look at the other side of it very critically.”

Rate hike will hurt capital costs, say economists

A Professor of capital market and Chairman Chartered Institute of Bankers of Nigeria, Abuja Branch, Prof Uche Uwaleke, said, “I think the decision by the MPC to further tighten monetary policy is justified by the need to tame inflationary and forex pressures and possibly stem capital outflows on account of the hike in policy rates in developed economies, especially in the US and UK. The primary mandate of the CBN is to maintain price stability.

“But, it has grave implications for cost of capital for firms, cost of borrowing by the government, stock market performance and output growth in general. It may also affect the asset quality of banks as they re-price their loans in response to the hike in MPR.”

He said that lending rates would go up, which would not bode well for small businesses seeking expansion.

“Expansion leads to higher production and higher profitability, which will also lead to employment generation. When people don’t have access to cheap funds, particularly the MSMEs, it’s not good for the economy.”

It may backfire by CBN in dilemma –Experts

Nigeria Consultant, ECOWAS Common Investment Market, Professor Jonathan Aremu, said interest rate and inflation worked more or less on a very parallel line.

“When one is going up, the other one will be going up as well, so also the exchange rate as well.

“The central bank is in position to do some things to be able to make sure that the interest rate is not out of tune. They can make borrowing expensive so that more people will not be borrowing, and when more people are not borrowing, there is going to be scarcity of money in the market.

“But in most instances, when people need money at all costs, they can get it at any interest. That is what we call “economic backlash.” Economic backlash is a situation whereby a policy which you put in place to be able to address a situation goes in the opposite direction. When you say that there is too much naira in the system and then raise the interest rate to make sure that people don’t borrow, note that there are some people who do not need to borrow in order to get ahead in their economic activities.