Market News

Again, CBN Raises MPR to 26.25% to Subdue Inflation - THISDAY

MAY 23, 2024

•Cardoso: Monetary tightening yielding desired outcomes, banking system safe, sound despite headwinds

•Plans stronger regulatory framework for fintechs 


•Teriba, CPPE say aggressive monetary tightening squeezing businesses, hurting borrowers  Naira sustains gains on official window, stable at parallel FX market

BY  James Emejo in Abuja, Nume Ekeghe and Dike Onwuamaeze in Lagos

Walking the talk, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) yesterday resolved to further raise the Monetary Policy Rate (MPR), the benchmark interest rate by 150 basis points to 26.25 per cent from 24.75 per cent, in its sustained effort to bring down inflation.

However, reacting to the decision of the MPC, Director General of Nigeria Employers’ Consultative Association (NECA), Mr. Adewale-Smatt Oyerinde; Chief Executive Officer, Economic Associates, Dr. Ayo Teriba; Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf; Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu;

Wealth Management and Business Development Consultant, Mr. Ibrahim Shelleng; and Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, argued that it would further squeeze operators in the real sector of the economy, have negative consequences on borrowers and slowdown economic growth.

The apex bank recently signaled a return to orthodox monetary policy regime as CBN Governor, Mr. Olayemi Cardoso, vowed to continue to adopt a contractionary policy stance to tackle inflation to achieve price stability – as long as it takes.

The CBN had raised interest rates by a total of 7.5 per cent since its maiden meeting in February as manufacturers continue to groan under high cost of funds. The MPR is the rate at which commercial banks borrow from the economy and often determines the cost of funds.

The bank at yesterday’s meeting, however, retained the asymmetric corridor around the MPR at +100/-300 basis points, and left Cash Reserve Ratio of Deposit Money Banks, and the Liquidity Ratio unchanged at 45 per cent and 30 per cent respectively.

Addressing journalists after the two-day meeting of the MPC in Abuja, Cardoso, said the focus of the committee remained to achieve price stability by effectively using tools available to the monetary authority to rein in inflation.

He said the MPC was faced with the option of either continuing with policy tightening or hold to observe the impact of previous rate hikes.

The CBN governor said, “Following an extensive review of risks and the near-term inflation outlook, the balance of risks suggests further tightening of policy to build on the benefits accruing from previous rate hikes.”

The Consumer Price Index (CPI) which measures the rate of change in prices of goods and commodities soared to 33.69 per cent in April with the food index peaking at 40.53 per cent year-on-year.

He said the MPC members observed that while year-on-year headline inflation in April 2024 rose moderately, the month-on-month measures of headline, food and core all declined significantly, coupled with a month-on-month decline of both headline and food indexes in March 2024.

This, he said, suggested that the recent tight monetary policy stance of the apex was beginning to yield the desired outcomes. He said the rate of increase in prices had now moderated.

The committee pointed out that inflationary pressure continued to be driven largely by food inflation, attributable to rising cost of transportation of farm produce; infrastructure-related constraints along the line of distribution network; security challenges in some food producing areas; and exchange rate pass-through to domestic prices for imported food items.

The MPC urged the fiscal authority to do more to address the security of farming communities to guarantee improved food production in these areas.

The committee further observed the recent volatility in the foreign exchange market, which it attributed to seasonal demand – a “reflection of the interplay between demand and supply in a freely functioning market system”.

The committee also noted the marginal increase in the external reserve balance between March and April 2024 and urged the CBN to sustain its focus on accretion to reserves.

Cardoso, who read the committee’s communique, said members commended the apex bank for the recent approval of licenses of 14 international Money Transfer operators (IMTOS), adding that this was expected to improve competition and lower the cost of transactions, and attract more remittances through formal channels.

He said the committee noted with satisfaction that the banking system remains safe, sound, and stable, despite the headwinds confronting the economy.

It also commended the recent recapitalisation initiative and urged the management to sustain its regulatory oversight to ensure the continued stability of the banking system.

According to him, members focused on the best policy approach to continue to guide the economy towards achieving an overall macroeconomic balance.

Asked about the disposition of the central bank to the fact that inflation pressure had persisted despite the recent aggressive MPR hikes, Cardoso said: “It is important to say that in terms of looking at the inflationary pressure over the past year, yes, it may appear that inflation is indeed getting more and more of an issue and frankly.

“However, I think there is light at the end of the tunnel, and that is because much as we see an increase in inflationary figures, way to go down to the specifics in terms of food, in terms of core, headline inflation, you’ll see that it is moderating and decelerating in increment, and that’s the good news.”

The CBN governor added, “For first time since October, we have seen a relatively significant moderation in the rate of increase on those components of inflation. So, that is very good news. I believe very strongly that the tools that the central bank is using are working.

“I have said several times that there’s no magic wand, these are things that need to take their own time, the pass-through and the effect of the measures in advanced countries in developing countries, they take time; but at least I am confident that the figures show it themselves that we are beginning to get some relief.

“And I believe that in another couple of months or so, we will see more positive outcomes from what the central bank has been doing.”

On why the central bank initially introduced the controversial cybersecurity levy which had now been suspended, Cardoso said, “Now for clarity, the cybersecurity levy originated from the CyberCrime Act in 2015 and 2024. The Act introduced the levy. It is important to say that given that it is an Act, it was considered extensively by both the House of Representatives and the Senate, and of course there was a public hearing as a result.

“After that, there was the issue of the levy which was stated clearly as 0.5 per cent, and was embedded within the final law.

“As central bank and as bankers to the government, we were merely implementing the law that had been enacted, and subsequently, as the federal government amended its position, we withdrew the circular that we issued to the various banks.”

The CBN governor also spoke on the recent directive of the apex bank that barred fintechs from onboarding new customers, noting that it was in the interest of Nigerians that the platform remained safe and secure. He also refuted suggestions that fintech may have been solely targeted.

He also clarified that contrary to reports, the central bank has not revoked the operating licenses of fintechs, adding that the current moves by the apex bank was to ensure that they operate in a properly regulated manner amid cases of money-laundering and other abuses.

He said, “The fintechs have not been singled out, or any exceptional kinds of treatment, they have not. So, I have read a couple of things in the press more recently, and I want to assure you that that is the farthest from the truth.

“On the contrary, we are very proud of what the fintechs over the years have been able to do for the country and the positive impact that it is having not just in the country but globally. So, it is for us to support them and help them to strengthen what they’ve already been able to accomplish.

“However, regulation is very critical in a sector that seems to have grown so incredibly rapidly. More recently we had spoken about that in the past, we had cause to take a deep dive look at the whole issue of illicit flows and money laundering particularly within the more heavily-regulated banking system.

“And we all know some of the issues that came out with crypto and some of the messages that we put out after that, which of course, gave us some cause to know that there was a need for heightened surveillance.

“And again, we are very happy that we have been able to have a very major handshake with the law enforcement agencies, which have helped in no small measure for us to identify where the potential leakages are and the places where we need to tighten regulation and surveillance.”

Cardoso said, “And for that reason, we were concerned about how we saw issues of money-laundering and illicit flows as they made their way within various sub-sectors of the financial industry. “We felt there was a need for us to take a breather and see how we could work with the different players there to strengthen regulations, not by any means to throw them out of business.

“And let me emphasise at this point in time, that we have not revoked the licenses of any of the Fintech organisations or any of those players, we have not. “We have had conversations with a number of them and we have explained that there is a need to take another look which we are doing right now at the processes and to see how to strengthen them because ultimately, who benefits from this and who loses from it?

“If we get it wrong, the public loses, if he gets it right, the public benefits. And it is our intention to ensure that our system is one that would benefit the general public. And it is for that reason, that we sat down, and we have tried to bring out remedial measures that will help that sector to tighten on the onboarding and even existing clientele base and I’m confident that as time goes on and hopefully in a couple of months I will say all this will be something of the past and then you will see that sector going back into what they have been known to do before, and certainly with a very stronger regulatory framework.”

On the state of banking industry recapitalisation, Cardoso said the whole essence was to make the industry stronger especially given President Bola Tinubu’s ambition for a $1 trillion- economy.

He said, “First and foremost, let me re-emphasise that as a central bank, it is our responsibility to ensure that the banking system is strong and is resilient.

“I am very happy to say and we have said it in the MPC communique that the banking system is indeed sound safe and fit for purpose as far as we can see so there is nothing for anybody to have any anxieties about.

“In terms of what we have done concerning recapitalisation, we were looking forward and saying that we need the banking industry to be a lot stronger and more robust, particularly considering the $1 trillion economy that the federal government is anchoring itself towards.

“We need a much stronger banking system. We need a banking system that will have sufficient shock absorbers in the case of any uncertainties within both domestic and international ecosystems.”

Continuing, the CBN boss said, “A lot of what has happened worldwide over the past months, all the relatively strong attacks that have been taking place on the financial and economic ecosystem have been relatively challenging and it’s important that we bolster ourselves and get ourselves ready so that in case there are further cases, we are in a position to withstand it.

“We have gotten much of the feedback from the banks with respect to what their plans are and again, to emphasise to those of you who may not remember; we gave them a long gestation period really to do this and we are hoping that the recapitalisation programme will be wrapped up within two years.

“So, we are not pushing any of the banks under excessive pressure or anything like that. The whole idea is to work with them to ensure that we can strengthen the banking system that we already have. Once we have finished the review of the submissions that have been made, we will communicate that directly to the banks.”

In the meantime, the naira continued its upswing on the official market yesterday while maintaining stability at the parallel market.

 At the Nigerian Autonomous Foreign Exchange Market (NAFEX) window, the naira appreciated by N3.31, to close at N1,465.68/$1 compared to Monday’s close of N1,468.99/$1.

On the parallel market, the naira remained stable at N1,440/$1, unchanged from the previous day’s rate.

Transaction volumes also saw a significant increase as the daily turnover surged by 66.15 percent, reaching $268.17 million yesterday, compared to $161.41 million recorded on Monday.

Additionally, the highest spot rate observed yesterday was N1,549, while the lowest spot rate recorded was N1,401.

Analysts Reactions

Meanwhile, the CBN’s interest rate hike came amid concerns by analysts who insisted that the continuous increase could jeopardise economic growth and make bank facilities costlier.

In separate interviews with THISDAY, they expressed worry that the business environment was becoming more challenging.

Reacting to yesterday’s increase in the MPR, the Director General of NECA, Mr. Adewale-Smatt Oyerinde, said successive increase in the MPR by the MPC would continue to hurt investment decisions in the private sector.

Oyerinde, noted that cost of borrowing for investment by organised businesses had increased since March 2024, when the policy rate was raised to 24.75 per cent, arguing that the new policy rate of 26.25 per cent would further affect private investment negatively.

He averred that it was implausible to control the current high inflation by continuously raising interest rate, noting that implementing tight monetary policy stance when firms’ investment expenditure and household consumption were at the lowest ebb, “may further incapacitate production and capacity utilisation in the   already challenged private sector.” 

Oyerinde, argued further that given the triadic nature of relationship among interest rate, inflation rate and exchange rate, it would, “be most improbable to address inflation crisis by elevating policy rate, since exchange rate has continued to degenerate.”  

According to him, the persistent high depreciation in the value of Naira would continue to feed inflation, while constraining firms’ investment and household consumption.

“Consequently, raising policy rate will further exacerbate inflationary pressure as growth in  factor costs and commodity prices become unbounded,” he said.

Oyerinde, also underscored the need to nip the root cause of recent spike in inflation in the bud and attributed the defying inflationary pressure to the liberalisation of FX in the country notwithstanding that the economy is heavily import dependent.

He observed that before the total floating FX regime was implemented, the economy was better-off with inflation anchoring below 20 per cent mark.

Consequently, he urged the government to reconsider the Guided FX floating regime, which is a dynamic and flexible FX management regime and has proven to be better than the current regime.

In his contribution, Teriba, who said he was still “waiting and watching” the effects of the MPC decision on the market, “three months after they had done 600 basis points hike cumulatively, and we didn’t see much impact on the exchange rate and on inflation.”

He added: “If you hike MPR by 750 basis points cumulatively as we have done now, it raises borrowing cost, if not restrict access. So, there would be output loss; we would lose investment and lose output.

“But those who raise rates perceive these as costs worth incurring, just to achieve stability. But the problem emerges when you incur those costs and make those trade-offs and no benefit is achieved, then it is futile. So, it remains to be seen whether this 150 basis points will have a different effect from the 600 basis points that had been done before.”

In the same vein, the CPPE described the further tightening of the monetary policy by the MPC as additional cross that investors with exposures to the banks would have to bear.

Commenting on the decision of the MPC to increase the MPR to 26.50, CEO, CPPE, Dr. Muda Yusuf, said the centre had wished that there would be a pause on further tightening of monetary conditions in the economy for a number of reasons. 

Yusuf said: “First, previous rate hikes have been quite aggressive, hurting output and real sector investments. Most economic operators with credit exposures to the banks have not recovered from previous hikes. Interest rates were already around 30 per cent threshold.

“Secondly, extant CRR of 45 per cent has profound liquidity effects on the financial system.  Both measures have dampening effects on financial intermediation, which is the primary role of banks in an economy.

“Thirdly, the monetary policy transmission channels are still very weak, given the level of financial inclusion in the economy. This limits the prospects of monetary policy effectiveness.”

He, therefore, summed up that, “the new rate hike is an additional cross to be borne by investors who have exposures to bank credit facilities.”

He added: “Naturally, a rigid monetarist disposition by the Central Bank is expected.  But we need to reckon with the costs to the economy.”

 Yusuf hoped with the positive outlook for domestic refining of petroleum products, “we may begin to see a moderation in energy cost and a pass through effect on general price level.

“This is one silver lining that is on the horizon at the moment.  Necessary fiscal policy support are urgently needed to compensate for the adverse impact of extreme monetarism on the economy,” he said.

Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, said the hike in MPR has implications for the cost of funds which has continued to rise, adding that, “This will ultimately be borne by consumers through higher prices of goods and services.”

He said, “Let’s give the MPC the benefit of the doubt. Although a continuous increase of MPR, in my opinion, is not going to control inflation. It is rather going to continue to increase, as the cost of funds will rise. This will ultimately be borne by consumers through higher prices of goods and services.”

Wealth Management and Business Development Consultant, Mr. Ibrahim Shelleng, said, “This further increase is a clear indication of the CBN’s signal to the market that it will continue to use orthodox monetary policy tools to fight inflation, even though it doesn’t seem to be translating to lower inflation.

“The much-anticipated capital inflows have not returned as quickly and as voluminously as expected, and the apex bank’s hawkish signaling has shown a rigid adherence to World Bank/IMF recommendations in fighting inflation, despite the continually stubborn uptick in month-on-month inflation.”

On his part, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, said, “The major reason for raising the MPR by another 150bsp to 26.25 per cent is to tame inflation but the past three increments have not succeeded in checking inflationary trend.

“This continuous increase in the MPR is having serious consequences on the economy because further hike in interest rates by DMBs will be implemented immediately thereby raising cost of obtaining facilities for businesses.

“These are very challenging times for the Nigerian economy and I just hope that the CBN knows how to get us out of the woods.”


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