Market News
MPC: Costly policy trade-off as FX crisis, minimum wage stir fresh challenge - THE GUARDIAN
From Geoff Iyatse, Helen Oji (Lagos) and Collins Olayinka (Abuja)
• ‘Nigerian inflation control rests more on fiscal authority’
• LCCI: We don’t need more interest rate hike
• Central bank is flogging dead horse, says Yusuf, others insist
• ‘Expect another 100-basis point hike or N2,000/$ exchange rate’
Fresh foreign exchange crisis and likely pep-up inflation expectation ahead of the implementation of the new minimum wage may not make the job of the Monetary Policy Committee (MPC) easier as they begin a two-day policy decision meeting today to assess the progress of its efforts to rein in high inflation.
The committee has pursued an aggressive monetary tightening policy for over two years, pushing the anchor interest rate up to 26.25 per cent, the highest in decades.
The Central Bank of Nigeria (CBN), ahead of the meeting last Friday, started the process of potentially pulling N20 trillion from the economy, which has seen the nominal money supply grow from N48.9 trillion in May 2022 when the monetary policy rate (MPR) was first raised after the COVID to N99.24 trillion in May.
In a follow-up circular to a similar one issued in 2015, the apex bank is recalling all unclaimed dormant account balances with the deposit money banks (DMBs), an amount earlier estimated at N20 trillion.
The decision could see about one-fifth of the money supply being sucked out of the economy and warehoused by the apex. The money, which forms a large chunk of the money base, will weaken the banks’ ability to issue fresh loans and potentially raise interest rates.
The move is already being interpreted to mean the monetary authority is not done with monetary tightening. The CBN Governor, Yemi Cardoso, had earlier vowed that the authority would do all it could to bring down inflation, with a target now set at below 25 per cent.
The International Monetary Fund (IMF) had also projected the inflation rate to slow down to 24 per cent this year. At over 34 per cent, more work is needed to bring down the inflation rate to CBN’s target.
Under Cardoso, interest rate tightening is being used as a two-pegged strategy – to ease inflation and stabilise the foreign exchange market through capital inflow.
Attaining the first objective may be in sight, especially with the benefit of last year’s elevated inflation base effect. Hence, Cordros Capital Research has projected the July inflation to slow down to 33.24 per cent.
The projection is hinged on the prediction that inflationary pressures may have peaked in June and should begin to moderate due to a high statistical base from the prior year and a slower increase in energy prices.
“Howbeit, this inflation targeting model has yielded little or no impact as the rate of headline inflation rises to new highs every month,” the analysts said.
Cowry Asset Management Limited predicted a moderation in inflation in the second half of the year largely due to the high base effects of the hike in interest rates.
According to the analysts, the slow acceleration in headline inflation over the last four months is an indication that the impact of the CBN’s tightening measures is permeating the economy.
But with the naira losing grip on the dollar again, some experts said the second attaining objective is at the heart of today’s meeting.
A higher interest rate would attract foreign capital inflow and make the money market more attractive to investors, who have the choice of converting their financial assets to dollars and thus heating the FX market.
But the rising cost of funds, which has become a major disincentive to investment also means there is an easy choice for the MPC. The famous investor, Aliko Dangote, merely echoed the popular sentiment recently when he warned: “Nobody can create jobs with an interest rate of 30 per cent. No growth will happen.”
Dozens of manufacturing giants have closed operations in the past five years owing to rising challenges in the business, chief of which is the prohibitive cost of borrowing.
Experts said inflation would need to slow down drastically to create space before below 30 per cent nominal interest rate. With headline inflation currently at over 34 per cent, banks are lending at a discount as the real interest rate is negative, a reason many commercial lenders have raised the nominal interest to cover about 35 per cent.
Speaking on the policy trade-off at the weekend, an economist, Kelvin Emmanuel, said he expected another raise between 750 and 100 basis points. He argued that the apex bank has no choice but to increase the rate at this time.
While he said he sympathises with the manufacturing sector over high-cost of borrowing with prices of food and basic items hitting new heights, holding the rate of reduction will spell more danger to the economy.
“The CBN just has to raise rates at this point. There is no other way out. If the rate does not respond to the inflation figure, people will simply convert their money to dollars and that will drive up the exchange rate which will exacerbate the exchange rate.
“The exchange rate may top N2,000/$ or above that. With the inflation moderating albeit by a slow margin, therefore, a rate hike in the region of 750 basis points should be enough to curtail inflation,” he said.
But he stressed that it is important for the MPC to consider linking loan deposit ratio performance to cash reserve ratio (CRR) and apply a method where CRR is tiered and banks are rewarded with a reduced CRR based on the performance of their loan-to-deposit ratio (LDR).
The MPC is likely going to be forward-looking in its decision and consider how the implementation of the new minimum wage is going to raise inflation in the coming months. Whereas that may not overtly change its cause of action, it could serve as a caution sign – that inflationary pressure is far from a won battle.
A further rise in rates will surely attract condemnation from the business community. The Lagos Chamber of Commerce and Industry (LCCI) has continually said that the interest rate hike will further increase the cost of doing business.
The Director-General of the Chamber, Dr Chinyere Almona, said while the CBN intends to control inflation, the hike will raise concerns about its effectiveness and impact on businesses and economic growth.
She insisted that the interest rate adjustment has shown that it has a significant impact on curbing inflation in Nigeria.
“The Chamber’s view on the current fight against inflation is that the monetary and fiscal authorities should focus on the factors driving the inflation rates by tackling the supply-side deficiencies instead of focusing too much attention on the demand-side management. We urge the CBN to continue with its FX market reforms to a conclusive end, as the high exchange rate against the naira is a major culprit in the skyrocketing inflation rates,” she stated.
An investment banker, Tolulope Alayande, said the major task of reining in inflation rests with the fiscal authority. He queried why the Ministry of Trade and Investment has been missing out on the discussion on inflation.
Alayande also blamed the Nigeria Customs Service (NCS) for prioritising revenue over creating an enabling environment to support trade.
“It is disheartening that we are not discussing the people that are responsible for halting inflation. We always mention CBN and the Ministry of Finance. That is a myopic view. NCS and the Ministry of Industry, Trade and Investment are the major government agencies we should be addressing. What are they doing to boost exports? Nigeria needs to produce and manufacture. Costs of borrowing must be friendly and that is where the CBN comes in. Inflation control depends on everybody within the government circle,” he stated.
President of the Chartered Institute of Bankers of Nigeria (CIBN), Dr Uche Olowo, noted that the resilience of Nigerian enterprises is being stretched to a limit, warning that the current economy cannot accommodate higher cost of borrowing.
Olowo said that the persistent inflation, despite various interventions from the apex bank, is an indication that monetary policy tools alone are not suitable to cool inflation.
He stressed the need for the fiscal authorities to rein in their spending, cut cost of governance and improve revenue generation to tackle current stagflation.
He said government at all levels must find lasting solutions to insecurity, noting that the presence of bandits has disrupted agricultural activities as farmers could no longer cultivate their farmlands due to fear of attacks.
Olowu added that the crisis has resulted in a significant decline in food production, which has ultimately constituted a huge threat to food security.
Vice President Highcap Securities Limited, David Adonri, said studies have shown that Nigeria’s inflation responds sparingly to interest rate increases.
According to him, the continued reliance on interest rate hikes and the decision by CBN to intensify its use serve no useful purpose but rather pose a serious threat to the productive economy.
He pointed out that the method has continued to escalate the cost of production and erode consumer pull thus serving as a disincentive to production.
Adonri said the remedy is to run a supply-side fiscal program under a secured production environment, noting that the current situation does not warrant a demand management strategy exemplified by contractionary monetary policy.
He added that the government is applying the wrong treatment to an economic ailment caused by supply-side dislocation by continuing the use of monetary policy.
Also speaking on the issue, the Chief Executive of the Centre for the Promotion of Public Enterprises (CPPE), Dr Muda Yusuf, said businesses can no longer absorb more rate hikes with additional pressure on the cost of funds.
He pointed out that Nigerian businesses are already grappling with myriads of problems impacting negatively on their cost of operations and profitability.
According to him, the way forward is for the fiscal authorities to expedite action on the execution of the various measures taken so far to curb inflation.
He said these fiscal approaches must be quickly accelerated and implemented to begin to have a positive effect on the economy.
While there is a consensus among economists and private sector advocates that the CBN may be flogging a dead horse with its resolve to continue with interest rate hikes, the economy is bracing for another MPR raise due for an announcement tomorrow.