By 
As the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) convenes today for a two-day policy decision meeting, it faces significant challenges posed by a fresh foreign exchange crisis and inflation expectations ahead of the new minimum wage implementation. The MPC’s task of reining in high inflation is becoming increasingly complex.
For over two years, the MPC has pursued an aggressive monetary tightening policy, raising the anchor interest rate to 26.25%, the highest in decades. Last Friday, the CBN initiated a process to potentially withdraw N20 trillion from the economy. The nominal money supply has surged from N48.9 trillion in May 2022, when the monetary policy rate (MPR) was first raised post-COVID, to N99.24 trillion in May 2023.
In a follow-up circular to a 2015 directive, the apex bank is recalling all unclaimed dormant account balances from deposit money banks (DMBs), an amount earlier estimated at N20 trillion. This move could see about one-fifth of the money supply being removed from circulation and warehoused by the CBN. Such a significant withdrawal could weaken banks’ ability to issue fresh loans and potentially raise interest rates further.
The move signals that the monetary authority is not finished with monetary tightening. CBN Governor Yemi Cardoso has vowed to bring inflation down, targeting a rate below 25%. The International Monetary Fund (IMF) also projected that the inflation rate could slow to 24% this year. However, with inflation currently over 34%, substantial work is needed to meet these targets.
Under Cardoso, interest rate tightening is being used as a dual strategy: to ease inflation and stabilize the foreign exchange market through capital inflow. Attaining the first objective seems within reach, especially given last year’s elevated inflation base effect. Cordros Capital Research has projected July inflation to slow to 33.24%, citing a high statistical base from the previous year and a slower increase in energy prices as factors.
Despite this, analysts from Cowry Asset Management Limited predict a moderation in inflation in the second half of the year, largely due to the high base effects of interest rate hikes. The slow acceleration in headline inflation over the past four months suggests that the CBN’s tightening measures are starting to permeate the economy.
However, with the naira losing ground against the dollar again, some experts believe that stabilizing the foreign exchange market will be a central focus of today’s meeting. A higher interest rate could attract foreign capital inflows and make the money market more appealing to investors, who might convert their financial assets to dollars, further stressing the FX market.
The rising cost of funds, which has become a significant disincentive to investment, complicates the MPC’s decision. Recently, Aliko Dangote echoed popular sentiment, warning, “Nobody can create jobs with an interest rate of 30%. No growth will happen.”
In the past five years, numerous manufacturing giants have closed operations due to rising business challenges, chief among them the prohibitive cost of borrowing. Experts argue that inflation needs to slow down drastically before the nominal interest rate can fall below 30%. With headline inflation at over 34%, banks are lending at a discount as the real interest rate remains negative, prompting many commercial lenders to raise nominal interest rates to around 35%.
Economist Kelvin Emmanuel expects another rate hike between 750 and 100 basis points, arguing that the CBN has no choice but to increase the rate at this juncture. While he sympathizes with the manufacturing sector over high borrowing costs and rising prices of essential items, he believes holding off on rate hikes would spell more danger for the economy.
“The CBN has to raise rates at this point. If the rate doesn’t respond to the inflation figure, people will convert their money to dollars, driving up the exchange rate,” Emmanuel said. “The exchange rate may top N2,000/$ or more. Therefore, a rate hike in the region of 750 basis points should be enough to curtail inflation.”
Emmanuel stressed that the MPC should consider linking loan deposit ratio performance to the cash reserve ratio (CRR) and applying a tiered CRR method, rewarding banks with reduced CRR based on their loan-to-deposit ratio (LDR) performance.
The MPC is likely to take a forward-looking approach in its decision, considering how the implementation of the new minimum wage will raise inflation in the coming months. While this may not overtly change its course of action, it could serve as a cautionary sign that inflationary pressure is far from being fully addressed.
A further rise in rates will surely attract condemnation from the business community. The Lagos Chamber of Commerce and Industry (LCCI) has consistently argued that interest rate hikes will increase the cost of doing business. Dr. Chinyere Almona, Director-General of the LCCI, said while the CBN intends to control inflation, the effectiveness and impact of the hikes on businesses and economic growth remain a concern.
“The Chamber’s view on the current fight against inflation is that the monetary and fiscal authorities should focus on the factors driving inflation rates by tackling supply-side deficiencies instead of focusing too much on demand-side management. We urge the CBN to continue its FX market reforms to a conclusive end, as the high exchange rate against the naira is a major culprit in the skyrocketing inflation rates,” Almona stated.
Investment banker Tolulope Alayande said the major task of controlling inflation rests with the fiscal authority. He questioned why the Ministry of Trade and Investment has been absent from the inflation discussion and blamed the Nigeria Customs Service (NCS) for prioritizing revenue over creating an enabling environment to support trade.
“It is disheartening that we are not discussing the people responsible for halting inflation. We always mention CBN and the Ministry of Finance. That is a myopic view. NCS and the Ministry of Industry, Trade and Investment are the major government agencies we should be addressing. What are they doing to boost exports? Nigeria needs to produce and manufacture. Costs of borrowing must be friendly, and that is where the CBN comes in. Inflation control depends on everybody within the government circle,” he stated.
Dr. Uche Olowo, President of the Chartered Institute of Bankers of Nigeria (CIBN), noted that the resilience of Nigerian enterprises is being stretched to the limit, warning that the current economy cannot accommodate higher borrowing costs. Olowo said the persistent inflation, despite various interventions from the apex bank, indicates that monetary policy tools alone are insufficient to cool inflation.
He stressed the need for fiscal authorities to rein in their spending, cut the cost of governance, and improve revenue generation to tackle the current stagflation. He emphasized that addressing insecurity is crucial, as bandit activities have disrupted agricultural operations, leading to significant declines in food production and threatening food security.
David Adonri, Vice President of Highcap Securities Limited, noted that studies show Nigeria’s inflation responds sparingly to interest rate increases. He argued that continued reliance on interest rate hikes poses a serious threat to the productive economy, escalating production costs and eroding consumer demand.
Adonri suggested that the remedy lies in running a supply-side fiscal program under a secure production environment. He criticized the government’s approach, saying it is applying the wrong treatment to an economic ailment caused by supply-side dislocation by continuing the use of monetary policy.
Dr. Muda Yusuf, Chief Executive of the Centre for the Promotion of Private Enterprise (CPPE), also stressed that businesses can no longer absorb more rate hikes, as they already face numerous challenges impacting their operational costs and profitability. He called for expedited implementation of fiscal measures to curb inflation.
Despite consensus among economists and private sector advocates that the CBN’s continued interest rate hikes may be ineffective, the economy braces for another MPR raise announcement tomorrow.
Comments