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…Experts express mix reaction over hike
In a move that took the market by surprise, the Central Bank of Nigeria (CBN) Monetary Policy Committee voted to further raise interest rate (Monetary policy rate) by 50 basis points to 27.25% from 26.75 percent.
The Governor of the CBN, Mr. Yemi Cardoso who doubles as the Chairman of the MPC disclosed this at the end of the MPC meeting held in Abuja.
The latest hike in MPR will result in a cumulative 850 basis points increase in MPR under the management of Governor Yemi Cardoso.
Analysts had expected the apex bank’s MPC to take a slightly dovish stance in interest rate in the light of two consecutive months of slowdown in inflation in July and August after almost 19 months of consecutive increase.
Nigeria’s inflation rate in July slowed to 33.4% from 34.19% in June 2024 and further eased to 32.2% in August.
The apex bank further increased the Cash Reserve Ratio (CRR) of commercial banks by 500 basis points from 45% to 50% while that of merchant banks was increased by 200 basis points to 16%.
Furthermore, the MPC raised the asymmetric corridor around the MPR to +500 and –100 basis points while the liquidity ratio was retained at 30%.
The Governor of the CBN noted that the decision to further tighten the monetary policy was a unanimous one by members of the MPC.
The spate of interest rate hike dates back to May 2022 when the hawkish monetary policy actions began.
According to the CBN, the decision to raise interest rate was premised on recent events in the economy regarding inflation and the stability of the foreign exchange market.
He mentioned the threats of food inflation, flooding in many parts of the country, rising petrol and energy prices as reasons while further monetary policy tightening should be executed.
Continuous interest hike as response to inflation
Speaking on inflation, Cardoso said: “We are resolute in our focus on bringing down inflation, and we would use all the tools at our disposal to ensure that it happens. We are not going to spare any effort in doing that.
“The numbers clearly show that we are heading in the right direction. The fact that we have seen the reductions and the deceleration over the course of the last couple of months is very good news.
“However, we are not out of the woods yet and we really cannot take any chances. We have been able to have an ongoing dialog with other stakeholders over a period of time to ensure that the food component moderates, and we hope that will continue to be the case.”
The governor also noted that there are other factors that impinge on both prices and aggregate demand, that need to be focused on.
“Indeed, we intend on doing exactly that, and that is the reason why we have taken the stance that we have taken, to tighten and continue to do so until we bring this under control.
“And let me conclude by saying that as far as I know, there is no economic model that portends to take people out of poverty when inflation is accelerating at the levels that we’ve seen it, there is none, and for that reason, we do not intend to relate and ensuring that we bring it under control.”
FAAC allocations impacting exchange rate stability
The CBN has alluded that there is a correlation between monthly disbursement from the Federation Account Allocation Committee (FAAC) and liquidity in the banking system stating that it impacts the exchange rates.
Following the announcement of the removal of petrol subsidy in May 2023, the monthly disbursement by the three tiers of government through the Federal Accounts Allocation Committee (FAAC) has increased significantly owing to non-payment of fuel subsidy.
Also, the exchange rate difference between the FX rate in the 2024 budget at N800/$ and the current rate has positively impacted the FAAC allocation and contributes significantly to total FAAC disbursement.
According to a study by Agora Policy, Between May 2023 and April 2024, exchange rate gains contributed N4.23 trillion to the monthly FAAC allocation, accounting for approximately 20% of the total FAAC disbursement to the three tiers of government during that period.
Cardoso stated that going forward the apex bank will monitor future disbursement by the FAAC to determine its impact on prices.
He said: “The MPC noted the continued growth in money supply recognising the need to curtail excess liquidity in the system as well as address foreign exchange demand pressures.”
“Members were also concerned about the growing level of fiscal deficit but acknowledged the efforts of the fiscal authorities not to resort to Ways and Means financing. Furthermore, members observed a strong correlation between FAAC releases and liquidity levels in the banking system as well as its impacts on the exchange rates.”
“The committee therefore agreed to increase monitoring of future releases with a view to addressing its effects on price development.”
Increased Remittances
The CBN governor disclosed that as of August, remittances hit $585 million, describing it as a big increase as it represents over 130 per cent for the corresponding period last year.
He said: “I want to just say to you that this didn’t drop from the ceiling. It was a deliberate, calculated effort.”
He stated that the bank will not rest on its oars, saying, “We are pretty confident that if we continue in that trajectory, that figure will continue to go up. I had committed, and I think this was probably in March earlier this year, and I said at the time, when I decided to engage this, that within a year, I would double that figure. We set up the committee, I head it, and I drive it personally. I am personally invested in that, and I am personally driving it, and I know that we will get the results that we need.
Dangote Refinery
Speaking on the commencement of petrol refining by the Dangote refinery, Cardoso said the refinery potends good things for the Nigerian economy.
He said: “Right now, imported oil products contribute between 10 and 15 percent of our imports and to the extent we are able to do away with that is a very good thing. There is of course for us to look with optimism that 10 to 15 per cent of what the pressure that we are getting will abate over a period of time.
“And of course, additionally, as production ramps up and we get to 2 million barrels and over and the export side starts to kick in and foreign exchange starts to come in. That also will further support the naira, and, of course, our efforts at managing the foreign exchange rate.”
Experts express mixed reaction over hike
Reacting to the decision of the MPC, Director/CEO, Centre for the Promotion of Private Enterprise [CPPE], Dr Muda Yusuf said: “It is quite troubling that at a time when manufacturers, entrepreneurs and other investors in the economy are craving for a breath of fresh air, the CBN chose to tighten the noose on them by resorting to a further tightening of monetary policy.
“The latest policy choice of the apex bank is at variance with the mood of most economic players and the desire to promote economic recovery and growth. What manufacturers and other investors need at this time is some oxygen and stimulus, not policy measures that would worsen an already suffocating situation.”
Dr Yusuf contended that the private sector should not be made to pay the price of liquidity growth which they were not responsible for. Issues of excess liquidity should be addressed within a causative context.
He said the injection of liquidity into the system is largely public sector driven, as rightly noted by the CBN Governor. Therefore, the focus of resolving it should be within that context. “Stifling the financial conditions to address liquidity issues is detrimental to investment and growth of the economy.
“The implications of the latest MPC decision for investors are quite concerning as cost funds would be further exacerbated, possibly well above 35% or more. It is made worse by the increase in CRR to 50% and retention of asymmetric corridors of +500 and -100.”
Also speaking on the decision, Professor of capital market, Uche Uwaleke said: “My take on the recent hike in MPR is that in matters like this, the CBN usually has information that may not be at the disposal of the public.
“I want to believe the members of MPC mean well for the economy and have taken the decision to further tighten monetary policy based on strong evidence of major threats to exchange rate and inflation.
“All said, the task of taming inflation must be jointly tackled by both the monetary and fiscal authorities. So, the government has to play its part by controlling recurrent spending and focusing on productivity, including ramping up assistance to small businesses.”
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