CBN raises interest rate to 14 percent
Rising from its 251st Monetary Policy Committee (MPC), the Central Bank of Nigeria (CBN) announced an increase in the benchmark interest rate by 200 basis points, from 12 to 14 percent.
Announcing the MPC’s decision, the CBN governor, Mr. Godwin Emefiele, said it was part of measures to attract foreign capital and check headline inflation that has risen to 16.5 percent.
The MPR is the rate at which CBN lends money to banks. If it goes down, the cost of lending by banks to customers goes down and if it goes up, the cost of lending also goes up.
The implication for this new increase is that the cost of lending will go up. Current lending rates hover around 23% to 25% and we can expect this to also increase by at least 1%.
The committee’s decisions, Emefiele said, recognised that the CBN “lacked the instruments required to directly jumpstart growth, and being mindful not to calibrate its instruments in such a manner as to undermine its primary mandate and financial system stability, in assessment of the relevant issues, was of the view that the balance of risks remains tilted against price stability.
“Consequently, five members voted to raise the Monetary Policy Rate while three voted to hold.”
However, operators in the real sector have faulted the increase of the rate from 12 to 14 percent, describing it as a constraint for business growth.
Speaking to Daily Trust after the meeting, Mr Muda Lawal, the Director General of the Lagos Chamber of Commerce (LCCI) said: “No! This is not in tandem with the economic reality. The economy is down. I mean we are on the threshold of a recession. Things are not going well. Consumer purchasing power is very low and businesses are facing a lot of pressure - pressure from exchange rate, depreciation, pressure from high energy cost, high cost of diesel, high cost of petrol, high transport cost.
“All these costs are enormous and if on top of that you are also increasing the interest rate, from business point of view, I don’t think that is the best. I don’t think it is the right decision.”
Muda argued that the CBN’s talks about attracting inflow of funds from foreign investors did not hold water.
“Interest rate issue is not as critical in attracting investment as having liquidity in the foreign exchange market. Though, they are doing well in trying to tackle liquidity in the foreign exchange market. But with this new policy, I don’t support them,” he said.
Mr Johnson Chukwu, the Managing Director of Cowry Assets, in his reaction said: “We were expecting the CBN to loosen monetary policy not tighten it especially in the face of a recessionary economy. We thought the CBN would have favoured the injection of liquidity.”
He said what the CBN was trying to do was to front-load its actions in anticipation of an expansionary fiscal disbursement.
Financial analyst and founder of Proshare, Olufemi Awoyemi in his twitter handle wrote: “the logic as presented (by the CBN) is evident at best, of antiintellectualism. Growth should be the goal, not price stability”
Bismark Riwane, CEO Financial Derivatives said the move was rather tactical than strategic, adding that the fundamental assumptions that drove the tightening could be flawed to the extent that the inflationary assumptions were not accurate.
He noted the hike in interest rate, considering the fact that the credit books of the banks could be threatened in terms of non-performing loans.
“How many small and medium scale enterprises can access credits and what does it mean when this interest rate is passed through to them? What will happen to these companies? Would they survive or close down? I won’t be surprised if this is visited in a short while,” he said.
Bayo Adeyemo, the Market Head and Country Treasurer at Citi Nigeria said investors that have dollars should bring back the funds and hedge them.
He noted that “FX shortages have been at the root of the issues that we have had and it is important the CBN tackles it once and for all. The stability of FX prices is critical and we hope this will bring it as well.”
In summary, the MPC voted to, increase the MPR by 200 basis points from 12 to 14 per cent; retain the CRR at 22.50 per cent; retain the Liquidity Ratio at 30.00 per cent; and retain the Asymmetric Window at +200 and -500 basis points around the MPR.
Such a decision, it was argued, gives impetus for improving the liquidity of the foreign exchange market.
“Members were of the opinion that this would boost manufacturing and industrial output, thereby stimulating growth which is desired at this time,” the CBN governor said.