NIGERIAN borrowers will face tougher times from this week as the Central Bank of Nigeria (CBN)’s Monetary Policy Committee (MPC) is set to significantly raise the monetary policy rate (MPR), otherwise known as the benchmark interest rate, on Tuesday, February 27.
The CBN is holding its MPC meeting today and will continue tomorrow, February 28. Major decisions on benchmark interest rate, capital requirement and liquidity ratios will be taken at the meeting.
At the last MPC meeting held in July 2023, the MPR was raised from 18.5 percent to 18.75 percent. The capital requirement ratio was retained at 32.5 percent while the liquidity ratio stood at 30 percent.
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The meeting was chaired by the then Acting CBN Governor, Mr Folashodun Shonubi. Interest rate decisions are often determined by inflationary trends and they both move in the same direction, economists say. Inflation stood at 24.80 percent in July 2023.
With inflation rising to 29.90 percent in January 2024, economists and finance experts estimate that the MPC may increase the benchmark interest rate to 22 percent to 25 percent on Tuesday.
Five economists interviewed by Economy Post suggested that the MPR could be closer to 25 percent to keep up with the pace of inflation.
“I suspect that the MPR will be raised to 22-23 percent by the MPC. While taking an interest rate decision, they will also be careful not to squeeze private sector borrowing,” said a United States-based economist, Dr Melvin Adikwu, who added that raising it above 25 percent could aggravate poverty and stifle investments.
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However, a finance expert, Mr Chibueze Odinkalu, projected that the rate could be closer to 25 percent (23-25 percent), contending that one major reason for high inflationary trend in the country was the wide gap between inflation and interest rates.
“There is a positive relationship between inflation and interest rates. In the United Kingdom, the inflation rate is 5.1 percent. As a result, the MPR is 5.25 percent. So, we need to allow both numbers to be closer in order to keep inflation down.”
Monetary policy increases
For two years, the CBN’s MPC retained the MPR (benchmark interest rate) at 11.5 percent. However, things began to change in March 2022 when the rate was reviewed upwards to 12 percent.
Since then, the MPR has risen from 13 percent in May 2022 to 18.75 percent in July 2023 (note that the table approximated the numbers) when the last MPC was held.
The new Bola Tinubu administration, which came in May 2023, is holding its first MPC today and tomorrow where key decisions will be taken. Banks are planning to adjust their interest rates as soon as the MPC announces the new benchmark rate, Economy Post understands.
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Is monetary policy sufficient?
Economists have argued whether the monetary policy alone could tame inflation. A lot of them believe that the monetary policy alone would not be able to do so but require the handholding of the fiscal policy side.
Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, said there should be a synergy between both policies for the inflation to begin to trend downwards.
Dr Yusuf said, “The CBN cannot achieve much even if it raises its interest rate to 40 percent but must understand that issues of insecurity, logistics, energy and other problems are major drivers of inflation.”
His argument is that the fiscal side, which is made up the ministers of finance; agriculture; industry, trade and investment; heads of Nigeria Customs Service, security agencies, among others, have a role to play in taming inflation.
He stressed the need for the Nigerian government to resolve insecurity preventing agricultural activities to enable farmers to move their products from farm to the market without hitches.
Cost of funds set to rise
The increase in interest rate is set to raise the cost of borrowing, which means that the private sector will struggle to access funds from banks and other financial institutions.
If the CBN’s MPC raises the benchmark interest rate to 22-25 percent, lending could cost between 35 and 45 percent in banks and other financial institutions. Old borrowers who are repaying loans borrowed from banks would also pay back higher interests, thereby squeezing their incomes and capacity to spend.
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According to Dr Adikwu, earlier quoted, raising the interest rate often led to lower spending and demand for goods as well as little borrowing.
“More importantly, once you increase the interest rate, you hurt people’s portfolio investments and trigger a sell-off of bonds, stock and other securities.
“But interests on saving accounts should also rise. During the last regime, it took time for that to happen because of poor regulatory framework, but once the interest rate rises, banks should be able to increase their savings rates,” he noted.
On his part, Mr Odinkalu, earlier quoted, said he was worried that a further push-up of the interest rate would squeeze out micro, small and medium enterprises (MSMEs) from the credit market and heighten poverty.
“The Nigerian government should begin to think of ways of making cheap funds available for businesses, especially MSMEs. Suspending intervention funds (which the CBN has done under Dr Yemi Cardoso) is increasingly becoming a bad idea. I know that there might have abuses of the intervention funds under former CBN Governor, Godwin Emefiele, but the current situation says you must bring it back but ensure you monitor them.
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“The government must begin to cut down taxes and provide incentives. Forget about naysayers, there are subsidies everywhere and the Nigerian people need them now.”
