Following the decision of the Central Bank of Nigeria (CBN), to jerk up its Monetary Policy Rate (MPR) to 14 per cent, business experts has predicted that the hike will lead to increased corporate failures, unemployment and decline in the nation’s stock market.
At the end of its Monetary Policy Committee (MPC) meeting in Abuja yesterday, the CBN, raised the MPR from 12 percent to 14 per cent, while retaining the Asymmetric Window at +200 and -500 basis points around the rate.
The apex bank also retained the Cash Reserve Ratio (CRR) and the Liquidity Ratio at 22.50 per cent and 30.00 per cent, respectively. Governor of the CBN, Mr. Godwin Emefiele, who announced the outcome of the MPC meeting, said that the move was towards ensuring price stability as it would attract more inflow of foreign exchange into the country.
Justifying the new rate, he said, “Basically, the issues were that you notice during the May meeting, the MPC decide to say look, if we notice the balance between inflation and growth that we should stay with growth and expect that growth. But given the fact that monetary authorities cannot directly influence, we expect that working with fiscal authorities we can achieve growth.
But at this meeting, we took a lot of time to deliberate on whether to favour growth as against inflation. “We felt that there was a need in line with the CBN core mandate to look at price stability at a time- that if we favour price stability at this time and it signals an interest rate movement that will curtail inflation that when we curtail inflation, a lot more stakeholders interests would have been met, thereby encouraging in this case the inflow of capital into the country.
“And as we have more inflow of foreign exchange into the country, what that does is that it deepens forex supply base and by deepening the forex supply base it makes forex available to end users, particularly to the manufacturing sector who need raw materials to boost manufacturing and industrial capacity and we are also hoping that when this is achieved, what you find is that naturally, prices would be affected downwards.
The move by CBN has however continued to generate reactions from stakeholders. According to the Managing Director, APT Securities and Funds, Mr. Garba Kurfi, “The upward increase in interest rate by the CBN is not the best at the moment if government is serious in encouraging local production. This is because high interest rate will make the cost of production higher if producers are to get loan at higher rate from the financial institutions. The high interest rate will discourage investments in the capital market if one can get 14 per cent risk free from the money market. This move apparently is likely to promote money market but with the inflation rate at 16.5 per cent may encourage”.
Also commenting, Head, Investment Research, Cowry Asset Management Limited, Mr. Edgar Ebinum said, “The reason for the hike is obvious but it is challenging for capital market, and it would stifle borrowing. While it is necessary to ensure a positive real return, by making the interest rate higher than inflation, but investors look beyond interest rate, the conditions in the economy is still not attractive to foreign investors The decision will cause the real sector to slow down, because there would be reduction in lending to the sector. In fact the hike makes lending more difficult for banks. The banks are already battling against rising non-performing loans and hence have reduced lending activities”.
On his part, Mr. Kunle Ezun, a research analysts with Ecobank Plc noted, “The decision was expected and the expectation has been factored into transactions in the money market. Remember that TBs were been sold at 14 per cent last week. That is why the market is calm. “I also believe that the 200 basis point raise is sufficient to address the rising inflation level now. The reality is that inflation level is more of consideration to foreign investors and they are not in the market now. The local guys don’t really bother about inflation.”
The hike in MPR was however commended by Managing Director, Chief Economist, Africa, Standard Chartered Bank, Mrs Razia Khan. She said, “The decision to raise the monetary policy rate despite growth concerns will give investors a clear signal on the authorities’ intent to sustain FX reforms. This should be well-received. “Given the cost-push nature of inflation in Nigeria, which largely stems from the shortage of FX, we believe that this was the right thing to have done. Today’s monetary policy decision demonstrates a commitment to FX liberalisation, which alone will undo some of the bottlenecks that have contributed to inflation.
