CBN raises in­ter­est rate to 14 per­cent

Daily Trust - - FRONT PAGE - By Chris Agabi & Sun­day Michael Ogwu, La­gos

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.

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