Financial analysts weigh the pros and the fitting parts in the MPR

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CBN Governor, Mr. Godwin Emefiele

For two and a half years, the Monetary Policy Committee of the Central Bank of Nigeria kept the policy rate at 11.5% until last week when it finally joined the global movement of rate hikes. interest. Festus Akanbi presents the view of financial analysts on the new monetary policy rate

Last week, the Monetary Policy Committee of the Central Bank of Nigeria finally succumbed to rising inflationary trends by raising the benchmark interest rate by 150 basis points, from 11.5% to 13%.

And as the Financial Derivatives Company of Nigeria puts it, the CBN has finally joined the global and regional bandwagon of interest rate hikes, having maintained the status quo ritual in 16 of the last 18 meetings.

He noted that headline inflation climbing to 16.82% in April (7.82%) above the CBN’s 9% target cap became the straw that broke the camel’s back. This sharp rise in cost inflation, compounded by a weak naira (N610/$), bleeding reserves and declining investor confidence, eventually forced the apex bank to raise the monetary policy rate (MPR) 150 basis points to 13% per year – the highest level in 70 months. Interestingly, all 11 committee members voted for a rate increase.

“The increase in MPC interest rates at a time of positive GDP growth (Q1’2022: 3.1%) bodes well for the Nigerian economy. Given that the MPC is an anchor rate and all other rates are expected to move in tandem, interest rates on fixed income securities will rise.This could keep the country’s government-backed securities relatively competitive with other emerging market economies. if cautious, would be encouraged to maintain their Naira holdings and reverse capital outflows which have increased by 72% over the past two years,” the FDC said in a report last released shortly after the MPC meeting.

Analysts, however, predicted that the lag between politics and the impact of transmission on the economy will be much shorter this time around, due to the charged political environment.

The MPC left other monetary policy parameters, including the apex bank’s cash reserve requirement (CRR) and liquidity ratio (LR), unchanged at 27.5% and 30%, respectively.

The MPR is the rate at which the apex bank lends to commercial banks and often determines the cost of funds in the economy.

New threshold to increase the cost of borrowing

Speaking to reporters at the end of a two-day meeting of the MPC, CBN Governor Mr. Godwin Emefiele, who read the committee statement, admitted that the rise in the MPR would increase the cost of borrowing, particularly in non-priority sectors of the economy. .

Emefiele, however, added that lending to key priority sectors, which had been identified to spur growth and create jobs, would remain at a single-digit interest rate of 9%.

The central bank governor stressed that the decision to raise interest rates was a last resort and a difficult decision for the MPC, which had crafted policies to boost economic growth as well as achieve financial stability. He said the CBN has adopted a restrictive monetary policy in view of the aggressive rise in inflation in recent times, which has led to high food and commodity prices in the country.

Emefiele noted that the CBN’s action was aimed at curbing inflation, on the one hand, and supporting the growth of the economy, on the other. He said the MPC was in a dilemma in deciding to raise the lending rate. As a result, the apex bank governor explained, a drastic measure such as raising the benchmark lending rate was needed to reduce monetary expansion in order to bring inflation under control.

He assured that even if inflation were to maintain an aggressive acceleration in the coming months, the central bank would not hesitate to return to its dovish stance whenever it saw a reduction in the overall index.

Signs of what to come?

Reactions to the MPC’s decision are varied. While some analysts see the CBN’s decision to break away from the rigid stance it has held for two years as a sign of more fundamental action to be taken, some commentators said much may not change until the government Nigerian will not boost production, build more infrastructure as well as protect small infrastructure in the country.

Responding to inquiries from THISDAY, Chief Economist and Head of Research, Middle East and Africa, Standard Chartered Bank, Razia Khan, said: “Given the accelerating speed of inflation of the CPI in Nigeria, we had forecast a “symbolic” increase of 50 basis points. The CBN delivered much more than that with its 150 basis point hike – which looks like more than just a token move.

“The obvious question here is whether this could be the precursor to a foreign exchange policy that could make today’s tightening much more effective. This could be the most important signal of possible exchange rate policy intentions to date – provided that market rates can revalue.

In his intervention, the Group Executive Director in charge of investment banking activities at Cordros Capital Limited, Mr. Femi Ademola, said that he cannot say whether the rate hike will have a reasonable impact, despite the change. position of the MPC.

He said: “It is uncertain whether the rate hike will have a reasonable impact on inflation in Nigeria.” He recalled that several researchers have concluded that Nigerian inflation is a structural problem and not a monetary (or liquidity) problem and that it is mainly a cost push rather than a demand push.

Lack of adequate infrastructure is a big threat

Insisting that the CBN’s measures may come too late to bring inflation under control, Ademola said until we have adequate infrastructure or destroy what little we have; inflation could remain high.

He argued that exchange rate volatility is not due to excess liquidity but to a high import content in our domestic consumption. It is also linked to the insufficiency of national infrastructures to stimulate production.

He pointed out that the supposed excess liquidity seems to be mainly in the banking sector only, explaining that the real and productive sector of the economy suffers from a lack of liquidity to grow and produce more.

According to the executive of Cordros Capital, although the CBN has promised to ensure that the main priority sectors of the economy obtain financing at single digit rates, the increase in the cost of borrowing for other sectors will likely increase the cost of production and eventually lead to higher prices. finished products.

On the immediate impact of the CBN policy on the MPR, Ademola said there might not be an immediate effect on ordinary Nigerians, however noting that “if the CBN can deliver on its promise to finance the sectors key priorities, especially food production, food inflation, which has the greatest weight in the calculation of the CPI can be moderated to benefit ordinary Nigerians.

For his part, the founder and managing director of the Center for Promoting Private Enterprise, Dr. Muda Yusuf, said that given the many headwinds that had posed significant risks to the national economy, the rise in the MPR of 150 basis points to 13% by the MPC was no surprise. He listed those challenges to include soaring commodity prices and the impact on energy costs, a surge in domestic liquidity due to campaign-related expenses, and global supply chain disruptions.

However, he argued that whether the CBN’s decision last week would have a significant impact on inflation is another matter. He noted that already, “bank lending has been constrained by the high CRR [many operators in the sector claim that effective CRR is as high as 50% or more for many banks]the discretionary debts of the apex bank, the loan-to-deposit ratio of 65% [LDR] and a liquidity ratio of 30%. The lending situation in the economy is already very tight.

He explained that the transmission effects of monetary policy on the economy are still very weak, saying that in the Nigerian context, price levels are not sensitive to interest rates. Supply-side issues are much deeper drivers of inflation.

Speaking about expectations of the latest MPC decision, Yusuf said: “What the recent rate hike means for the economy is that the cost of credit for the few recipients of bank credit will increase, which will impact on their operating costs, product prices, and profit margins. Investors in fixed income instruments could also benefit from the rise. There would be negative effects on the equity market.

As Nigerians await the transmission of the new monetary policy rate in the economy, all eyes will be on the apex bank to see if it can seize the current momentum to revamp exchange rate policies to end distortions. current conditions and the resulting pressure. on the naira.

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