Some Economists have projected that more businesses will pack up leading to more job losses following the decision of the Monetary Policy Committee of the Central Bank of Nigeria to hike monetary policy rate (MPR) by 400 basis points to a record 22.75%.
The MPC, at its first meeting presided over by Olayemi Cardoso, had also raised the raised the CRR to 45%.
This was announced by Cardoso, governor of the CBN, who chaired the Monetary Policy Committee (MPC) meeting for the first time since he assumed office in September 2023.
The CBN governor said the move was in a bit to tame the stubborn inflation that had not responded much to the previous marginal increase.
According to him, the committee raised the MPR by 400 basis points to 22.75 percent, and adjusted the asymmetric corridor at +100 and -700 basis points from +100 basis points and -300 basis points around the MPR.
He said the committee also increased the cash reserve ratio (CRR) from 32.5 percent to 45 percent, while retaining the liquidity rate at 30 percent.
On inflation, he said the rate of change in prices of goods and services rose to 29.9 percent in January 2024, from 28.92 percent in December 2023
He attributed the hike in inflation to rising costs of energy, high fiscal deficits and insecurity.
Addressing journalists after a two-day meeting, Cardoso said the move was part of the moves to tame rising inflation.
He said, “All 12 members of the committee decided to further tighten monetary policy by raising the MPR by 400 basis points to 22.75 per cent from 18.75 per cent. Adjust the asymmetric corridor around the MPR to +100 to -700 from +100 to -300 basis points. The committee also raised the cash reserve ratio from 32.5 per cent to 45 per cent while retaining the liquidity ratio at 30 per cent.”
At the last meeting in July 2023, the MPC, headed then by the former acting Governor of the apex bank, Folashodun Shonubi, increased the monetary policy rate by 25 basis points to 18.75 per cent, from 18.5 per cent in May last year. The CRR was retained at 32.5 per cent while the liquidity ratio stood at 30 per cent.
Since then, the MPR had been raised from 13 per cent in May 2022 to 18.75 per cent in July 2023 when the last MPC was held.
Analysts’ expectations had been divergent ahead of the first MPC meeting but the new rate surpassed all projections by financial experts.
According to a Reuters poll released last Friday, the policy rate was expected to be increased by 225 basis points to 21.00 per cent. Other experts had projected between 20 to 21 per cent.
Justifying reasons for the hike, Cardoso explained that members considered various scenarios including whether to hold or hike the policy rate.
He said the MPC concluded that inflation could become more persistent in the medium term and pose more regulatory issues if not well-anchored. Thus he said the members voted for a significantly high policy rate hike to drive down the inflation rate substantially.
He mentioned that the meeting extensively discussed various distortions in the foreign exchange market, particularly the impact of speculators exerting upward pressure on the exchange rate, leading to a significant pass-through effect on inflation. The consensus reached involved a substantial policy rate hike aimed at effectively reducing inflation.
He said, “The committee’s decisions were centred on the current inflationary and exchange rate pressures, projected inflation, and rising inflation expectations. Members were concerned about the persistent rise in the level of inflation and emphasised the committee’s commitment to reverse the trend as the balance of risk leaned towards rising inflation. The committee, however, acknowledged the tradeoff between the pursuit of output growth and taming inflation but was convinced that an enduring output expansion is possible only in an environment of low and stable inflation.
“In the opinion of the committee, the options available for decision were to either hold or hike the policy rate to offset the persistent inflationary pressures. Considering the option of a hold policy, the evidence revealed that previous policy rate hikes have slowed the rise in inflationary pressure, but not to a desirable extent. Members considered various scenarios of hold and hike and concluded that inflation could become more persistent in the medium term and thus pose more regulatory challenges if not effectively anchored.”
Nigeria’s inflation rate is currently 29.9 per cent and is expected to worsen in the short to medium term. Economic hardship in the country has worsened in the past months, leading to protests in several parts of Nigeria.
Recently, protests broke out in different parts of the country in reaction to the high cost of living with citizens in Niger, Kano, Kogi, Ondo, and other states demanding solutions to the economic crisis.
The Nigerian Labour Congress has also embarked on a peaceful protest in various parts of the country, lamenting the high cost of living.
However, Cardoso responding to questions on how the CBN intends to tackle the country’s biting economic hardship, assured the public of his intent to restore confidence in the financial market.
He said, “As the central bank governor, I and my team are not responsible for the woes that we have today. We are part of the solution. We are determined to ensure that we work hard to get out of the mess that Nigeria is in. We assumed responsibility in a time of crisis of confidence. There was a crisis of confidence and you may all want to go to bed and wish that crisis of confidence was not there, but it was. And we can’t turn back the clock. All we can do is do the difficult things to make a bad situation better. And I do believe that the efforts that we are making are beginning to bring back confidence.
“We are now at the stage where we’re trying to rebuild and rebuild better and rebuild in a way that those who now come will see that they have something on the ground that is sustainable. No point in building something that will crash after a number of years. That’s not the idea. The idea is to put something in place. This. That will be able to outsurvive all of us.”
Meanwhile, members of the private sector and economists have faulted the MPC decision, saying it would lead to fresh job losses and possibly lead to recession.
Speaking to Punch, the economists expressed concerns about the impact of the hike on the average Nigerian and the economy.
Chief Economist at SPM Professionals, Paul Alaje, told Punch that while the measures might tackle inflation, they might not create respite for Nigerians.
“The implications are not going to be as comfortable as we thought. Businesses that are funded by banks or businesses that are on bank loans will have to brace up for a major increase in bank rates that they will be receiving possibly from this week or next week from their respective financial institutions," he said.
“The implication is that unemployment will increase. If businesses find it so hard to do business because of increasing bank rates as induced by high MPR and CRR, we have to brace for the challenges. Inflation is expected to go slowly. However, despite these adjustments, inflation will still grow. It might not be as sporadic as it is growing right now. Time will tell. What we are saying is that we have still not dealt with the cost-push inflation that is currently a major factor of the current inflation in Nigeria. And you know that inflation in Nigeria is driven by food inflation and imported inflation. The exchange rate is a major factor as well as prices of commodities.”
Also, a professor of Capital Market at the Nasarawa State University, Uche Uwaleke, said, “Jerking up the MPR by 400 basis points in one fell swoop is simply an overkill. Why not by not more than 200 basis points since they have another opportunity to meet next month and review the impact?
“They didn’t stop at MPR, they also jerked up the CRR to 45 per cent which at the previous level of 32.5 per cent was among the highest in Sub-Saharan Africa. The CBN governor had assured Nigerians that the policies of the bank would be evidence-based. Which empirical results support this aggressive move?”
“I pity the real sectors of the economy. The implication is that for every deposit in the bank, CRR takes 45 per cent of it while the Liquidity ratio takes 30 per cent. So it is only 25 per cent of the deposit that banks can lend! This has negative implications for access to credit, cost of capital for firms, cost of debt service by the government and asset quality of banks.
“Expect banks to quickly re-price their loans with negative consequences for non-performing loans and financial soundness indicators. By this overkill on the economy in a bid to crash elevated inflation which by the way has numerous non-monetary factors driving it, output is bound to shrink. So, expect lower GDP numbers, especially from agricultural and industry sectors as well as a surge in unemployment levels. This is not a welcome development.”
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