The Monetary Policy Committee of the Central Bank of Nigeria (CBN) has raised its benchmark Monetary Policy Rate by 150 basis points to 26.25 per cent from the previous 24.5 per cent. The CBN governor, Olayemi Cardoso, disclosed the key decisions taken at the 295th MPC meeting, which would rein in inflation and achieve price stability. The headline inflation for the month of April was 33.69 per cent.  This is the third time this year that the MPC would hike the lending rate.

However, the apex bank retained the Cash Reserve Ratio (CRR), which is the percentage of deposits that commercial banks must keep with the CBN, at 45 per cent and adjusted the CRR of merchant banks to 14 per cent and the liquidity ratio retained at 30 per cent. The CBN believes that the new rate will bring inflationary pressures under control. It also underscores the bank’s optimism that the various tools deployed to create a stable foreign exchange market will yield the needed results in the coming months.  Food inflation continues to soar and the naira still depreciating against major foreign currencies.

According to the latest figures from the National Bureau of Statistics (NBS), food inflation for the month of April stood at 40.53 per cent. It was 40.1 per cent in March. As of last week, the naira plummeted to N1,500/$1. At this time in 2023, the naira exchanged for N450/$. Expectedly, the CBN’s latest decision to hike interest rate has elicited reactions, with many policy experts, including Organised Private sector, expressing deep reservations that the new lending rate will lead to rise in inflation,  massive job cuts in the productive sector, especially the manufacturing and other sectors that rely on bank loans for their funding needs and generally worsen the economic situation. 

Cardoso admitted that there are several challenges confronting the effective moderation of food inflation, such as rising costs of transportation of farm produce, infrastructure-related constraints along the line distribution network, security challenges in some food- producing areas of the country, as well as exchange rate volatility. No doubt, the monetary policy tools being used by the CBN are apparently not achieving the intended results.

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The hike in interest rate will not augur well for businesses. From all indications, the interest rate hike is seemingly extreme. It will encourage banks to charge higher than prevailing inflation rates when lending money to customers.  In the face of rising energy cost, unstable forex rates and associated costs, it is challenging to run a business. The hike will discourage investments. Business operators with credit exposures are yet to recover from the previous hike of 24.75 per cent. Currently, banks’ interest rate is about 30 per cent. Even the CRR rate of 45 per cent and the liquidity ratio of 30 per cent will worsen the situation. There is urgent need for fiscal policy support to compensate for the adverse effects of the hike in interest rate. 

The hike in MPR will significantly hamper business operators’ ability to repay their loans. The Organised Private Sector has underscored this point. The members’ concern needs to be addressed. Last year, the Manufacturers Association of Nigeria (MAN) lamented that its members borrowed N1.8trillion from banks in the first half of 2023 to remain in business. According to CBN, the Non-performing loans (NPLs) in the banking sector stood at over N1.5trillion in 2023 finance year. The NPLs ratio for last year was below the maximum prudential requirement of five per cent of banks last year. It reportedly declined from five percent in June 2023 to 4.1 per cent in December 2023. 

We believe that the CBN is using the wrong metric to fight inflation and recommend that it should engage private sector players in the formulation of monetary policies. The CBN’s approach in fighting inflation cannot ensure economic growth. The CBN should also apply an import duty exchange rate that is lower than the official rate for a specified time-frame to enable seamless business planning. The government should implement targeted fiscal and monetary policies that can boost food production, lower the cost of doing business and overhaul transport infrastructure. 

Let the government consider non-cash intervention that will reflate the economy without necessarily increasing the currency in circulation.  Transparency in the forex market is key to shoring up the value of the naira. There is need to prioritise forex and credit allocation to key sectors of the economy and stabilise the naira.

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