…As stakeholders react
By Isaac Anumihe, Abuja and Blaise Udunze
THE Central Bank of Nigeria (CBN) Tuesday surprisingly raised the benchmark interest rate to 12 per cent from 11 per cent in a bid to curb galloping inflation after cutting the rate barely four months ago.
The bank also raised the cash reserve ratio (CRR) for commercial banks to 22.5 per cent from 20 per cent while holding the liquidity ratio at 30 per cent. CBN Governor, Godwin Emefiele, who addressed the press after a meeting of its Monetary Policy Committee (MPC) stated that the central bank would keep the naira foreign exchange rate stable despite its sharp fall on the parallel market due to foreign currency shortages.
Emefiele attributed the rate hike to the state of the economy and rising annual inflation, which hit 11.4 per cent in February, a three-and-a-half year high and well above CBN’s target band of 6 to 9 per cent.
“The Committee noted that excess liquidity in the banking system was contributing to the current pressure in the foreign exchange market with a strong path through to consumer prices,” he told reporters.
But some analysts saw the tightening of monetary policies as a signal that the bank would devalue the naira eventually. The currency has fallen some 40 per cent on the parallel market as importers struggle to get dollars from official channels.
“This definitely reflects a departure from policy in recent months and we interpret this as a leading indicator for a possible naira devaluation later down the line,” Cobus de Hart, analyst at NKC African Economics told Reuters.
“This may signal that the central bank is starting to lean towards tightening policy in anticipation of higher inflation following a devaluation,” he said. Alan Cameron, an economist at brokerage Exotix, said the central bank had raised the benchmark rate as the previous loosening of monetary policy had not given a fillip to the economy.
“I think there is a realisation the liquidity they have been injecting wasn’t turning into overall lending in the economy because the confidence is not very high, so it made sense to withdraw that.”
The Head of Research and Investment, Afrinvest West Africa, Ayodeji Ebo said the decision to hike CRR by 2.5per cent to 22.5per cent was in a bid to curb speculative activities in the FX market, which he estimated would quarantine the sum of N409.7billion from the system.
On the fiscal side, the MD/ CEO, Cowry Asset Management Limited, Johnson Chukwu, said the implications of tightening of monetary policies was that the slow growth in GDP may worsen in the absence of major stimulus from the fiscal side.
According to him, if the budget is immediately approved and implementation starts in earnest, the expansionary nature of the budget will offset the negative effect of the contractionary monetary policies.
He, however, doubted if the increase in CRR and MPR would have any moderating effect on the inflation rate given that the upsurge in inflation was not driven by credit expansion to the private sector.