Interest rate is one of the key tools deployed by Central Banks across the world to manage the flow of money and productivity in their respective jurisdictions. A change in the interest rate could have ripple effects on macroeconomics and other key economic indicators like consumer spending and borrowing.
For two and half years the Central Bank had held the Monetary Policy Interest rate at 11.5 per cent but finally took the difficult decision to raise borrowing interest rate by 13 per cent, ostensibly to curb global inflationary rate while leaving untouched other monetary policy parameters, including the apex bank’s Cash Reserve Requirement (CRR) and the Liquidity Ratio (LR), unchanged at 27.5 per cent and 30 per cent, respectively.
Members of the CBN Monetary Policy Committee voted six out of eleven members to raise the borrowing rate. The slim margin separating the ‘Nays’ from the ‘Yes’ showed the idea of raising interest rate may not be too popular even amongst the members of the Monetary Policy committee.
The unexpected increase in Interest Rate immediately drew flaks from the Manufacturers Association of Nigeria. The group described the measure as not being manufacturers-friendly. Some analysts also agree with MAN and have variously questioned the rationale, timing and propriety of the CBN’s hike in interest rate.
Critics of the new interest regime argue that the increase in interest rate will kill the already suffocating manufacturing sector. They argue that the measure will push inflation beyond the roof rather than curb it. According to Vivian Ojadi, a Nigerian born economic analyst based in the United States, what the country needs now is not a policy that will make an already bad situation grow worse. According to her, ‘manufacturers will need access to credits at low borrowing rates to remain in business and not otherwise, as a huge component of the manufacturing business require huge capital financing.
However, in announcing the MPC’s decision to hike interest rate at the post-MPC briefing in Lagos, the CBN Governor, Mr. Godwin Emefiele, emphasized that the move was aimed at reining in rising inflation to prevent it from retarding growth. The CBN governor explained that while MPC was conscious of the fact that raising rates could hurt manufacturing output, the apex bank is also aware that aggressive movement in inflation could retard growth.
He said: “Like you all have noticed, globally since the beginning of the year, there has been heightened level of inflation. To the extent that today we see even in developed economies, the fact that even as a result of rising inflation, supply chain problems and the rest of them, even most of those developed economies are already facing a threat of recession.”
Specifically, he noted that with inflation in the United States rising from 2.5 per cent in 2020 to 9.1 per cent, according to latest data, the Federal Reserve has had to increase rates four times this year alone.
Similarly, according to him, “in Egypt, the monetary authority has increased their rates three times this year because in 2020, the inflation rate was 7.3 per cent and today it is 13.2 per cent. Ghana has increased rate three times this year; inflation (Ghana’s) has moved up from 7.8 per cent in 2020 to 30 per cent.”
Emefiele, who pointed out that some of the world’s advanced economies, such as the United States and the European Union (EU) have suffered massive declines in their output, said that with the United States recording a negative output in the first quarter of this year, there was the real fear that if the world’s biggest economy records a second decline in output in the second quarter of 2022, it would have slipped into recession, a development that would impact the global economy negatively.
According to him, the concern over surging inflation and its impact on growth is such a serious issue all over the world currently that members of the MPC did not even bother to consider the options of holding or reducing the MPR during their meeting.
The CBN governor said: “Surging inflation is a very serious matter that MPC members take very seriously, because what you find is that as inflation continues to trend aggressively higher, it would no doubt begin to adversely retard growth in any economy.
“Whereas in Nigeria, what we have done in our own attempt to pursue a policy of price stability that is conducive to growth, we have tried over the past couple of (MPC) meetings to leave rates the way they are, while at the same time, we have been pushing hard on how to improve on output growth.”
As he put it, “in 2020, Nigeria’s inflation was 12.13 per cent, today, the last data released puts inflation at 18.6 per cent. MPC members feel that we cannot just hold rates, we cannot just continue to watch inflation grow the way it is rising; that something must be done to rein in inflation.
“We conducted a very serious analysis, looking at the various data that were presented and we felt that there is a need to rein in inflation, not just because we want to look at what other economies are doing but also because we need to do a lot more work on inflation. And that is the reason MPC did not even take any look at whether to hold rates constant or to loosen.”
The CBN governor further stated that while members of MPC were aware that some analysts had not expected the committee to tighten at a second consecutive meeting on the grounds that such a move would increase cost of borrowing and also weaken manufacturing output, the committee would continue to tighten if inflation continues to surge.
He said: “The important thing is that as long as we see inflation at the level that can retard growth, it must be dealt with, while at the same time we are looking at how do we use developmental finance tools to push towards improved output growth. That is what we are doing and at the same time I want to signal, that the MPC is very determined that if inflation continues at this rate, particularly aggressively, we would continue to tighten.”
However, reacting to the MPC’s decision, analysts at CSL Research cautioned that a perpetual increase in rates could hinder the country’s fragile economic growth. The analysts, in a note released at the weekend, stated: “The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) unanimously raised the MPR from 13.0 percent to 14.0 percent, the second consecutive hike and a cumulative 250bps increase within three months.
“With the current narrative on inflation, the committee was of the view that neither holding nor loosening the policy parameters was an option, given the impact of the rising inflationary pressures, which may begin to erode the moderate gains achieved in improving consumer purchasing power.
“We retain our view that a continuous hike in rate will likely constrain the country’s fragile growth while achieving very little in terms of combating inflation and attracting foreign inflows.”
The previous hike in policy rate of 150 basis point did not have any significant impact on the inflation numbers. If anything, the general price level became even more elevated.”
Despite the doubts expressed about the rate hike by some analysts, however, the consensus in industry circles is that the CBN is right to deploy traditional monetary policy tools to combat the monster, which eats up savings. From the tone of the CBN governor’s speech it appears that the apex bank will not relent until it wins the inflation battle.