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Financial experts have issued a cautionary warning to the Central Bank of Nigeria (CBN) against raising the Monetary Policy Rate (MPR) further to combat inflation, stating that such a move could worsen the current state of the economy.
As the CBN’s Monetary Policy Committee (MPC) prepares for its July meeting, these experts emphasized that several factors might prompt the Committee to consider increasing rates. However, they strongly advised against this course of action, as it could have detrimental effects on the economy.
Professor Uche Uwaleke, a Capital Market expert at Nasarawa State University, highlighted that the MPC’s decision in the July meeting might be influenced by rising inflation expectations, primarily due to the sudden removal of fuel subsidy. The recent Naira float also caused pressure on the currency and exchange rate volatility, further affecting the MPC’s considerations.
Experts argue that the removal of fuel subsidy has resulted in reduced economic activities and productivity, negatively impacting economic growth and employment. In this context, raising the MPR would exacerbate the situation, leading to higher costs of capital and limited credit access for small businesses.
Moreover, an MPR increase could jeopardize the asset quality of banks, as it may result in an upsurge of non-performing loans when Deposit Money Banks (DMBs) reprice their loans.
The experts advised the MPC to avoid further rate hikes and maintain a hold position on all policy parameters. They stressed that while the primary mandate is to maintain price stability, the MPC also has a responsibility to support output growth. They emphasized that many factors driving inflation in Nigeria, such as insecurity affecting food output and high energy costs, are beyond the CBN’s control.
According to the experts, the MPC should take advantage of the upcoming meeting to signal its readiness to support output growth. They recommend adopting policies that foster a low-interest rates environment while monitoring inflation, using a mix of heterodox measures.
Mr. Okechukwu Unegbu, a past President of the Chattered Institute of Bankers of Nigeria (CIBN), proposed lowering the MPR to facilitate easier access to credit for the productive sectors of the economy, particularly manufacturing and small businesses. He suggested that DMBs’ lending rates should be influenced by interest rates on savings.
Mr. Yemi Kale, Partner and Chief Economist at KPMG Nigeria, pointed out the MPC’s dilemma since the suspension of the CBN Governor. He acknowledged the slow and fragile economic growth, necessitating liquidity, while inflation rates are high and rising. The recent subsidy and FX reforms are likely to drive inflation even higher, adding to the challenge of controlling inflation effectively.
Given the circumstances, the CBN faces the difficult task of pulling inflation down without further hurting economic growth. Mr. Kale anticipated that the CBN might tighten the MPR but release the Cash Reserve Ratio (CRR) to support the economy.
The 292nd meeting of the MPC, scheduled for Monday and Tuesday, will be chaired by Mr. Folashodun Shonubi, the Acting Governor of the CBN. This marks the first MPC meeting in about nine years to be chaired by someone other than the suspended CBN Governor, Godwin Emefiele.
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