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Tuesday, January 31, 2023

Experts Criticize CBN’s Rate Hike, Claim Significant Inflation Drivers have Not been Addressed

The Central Bank of Nigeria (CBN) hiked the Monetary Policy Rate (MPR), which measures interest rates, from 16.5 percent to 17.5 percent yesterday to manage inflation, despite economists’ reservations, noting unmet inflation factors.

The CBN Governor, Godwin Emefiele, announced this after the apex bank’s Monetary Policy Committee (MPC) meeting in Abuja, noting that decelerating inflation is not enough to halt interest rates just yet.

Specifically, the MPC raised the monetary policy rate by 100 basis points to 17.5 per cent and kept the asymmetric corridor at +100/-700 basis points around the MPR. The MPC retained Cash Reserve Ratio (CRR) by 32.5 per cent while liquidity ratio was kept at 30 per cent.

Emefiele said MPC “members welcome the recent deceleration of the year-on-year headline inflation, noting that the persistence in policy rate hike over the last few meetings of the committee have started to yield the expected decline in inflation.”

The CBN governor said the committee considered perennial scarcity of Premium Motor Spirit known as petrol, the 2023 general elections, continuous rise in energy prices, exchange rate pressure, as well as continuous rise in insecurity.

Announcing the committee’s decision, Emefiele said, “MPC was of the view that although inflation rate moderated marginally in December, the economy remained confronted with the risk of high inflation with adverse consequences on the general standards of living.

“Committee, therefore, decided to sustain the current stance of policy at this point in time to further rein in inflation aggressively.
“MPC voted to raise the MPR to 17.5 per cent, retaining the asymmetric at +100/-700 basis points around the corridor.”

Some stakeholders, however, disagreed with the apex bank, noting that the rate hike will hurt investors in the real economy.

Director, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, said the implication of the rate hike is that lending rates will increase for investors that are indebted to the banks, further implying an increase in operating and production costs.

He added that the hike would ultimately impact adversely on economic growth, while challenges of access and cost of credit by small businesses would be further elevated.

According to him, monetary policy tightening has very limited impact on inflation, noting that the economy is not a credit driven one as consumer credit is not on a scale to be reckoned with.

He identified key drivers of inflation to include, exchange rate depreciation, foreign exchange market illiquidity, insecurity, high energy cost, especially diesel cost, climate change and the massive injection of liquidity into the economy through the controversial ways and means financing.

These inflation drivers, according to him, are not within the purview of the CBN.

On his part, the Chief Executive Officer of Dairy Hills Limited, Kelvin Emmanuel, said raising the MPR in spite of the December inflation numbers showed ease in core inflation to 21.34 per cent proves that inflation reporting in Nigeria is distorted.

He added that the CBN needs to understand that rising inflation is a welfare cost on the people, and that from a demand-pull perspective, considering that 70 per cent of the inflationary buffer is a weak exchange rate, adopting an exchange rate targeting model will be more effective than an inflation targeting model.

Emmanuel advised: “It is time for the Senate to save the CBN from itself since it has failed to self-regulate as it regards the violation of ‘ways and means’ that has raised the M1 money supply and accelerated the cost-push inflationary buffers.

“Smart thing to do is for the Senate to amend the CBN Act, and include a clause as 38(4) that will require the National Assembly to pass a majority vote for the five per cent limit of real revenues for the previous accounting year to be violated in any financial year.”

On his part, Prof. Pat Utomi has cautioned the MPC against further increases in the interest rate to avoid possible cost-push inflation in the country.

He said the current inflation rate could better be managed from the fiscal side especially for the government to up revenues.

Utomi noted that the time has come for the monetary authorities to encourage business savings that will not create panic.

In his submission, Prof Sherifdeen Tella said there was no basis for increasing the interest rate, stressing that the real interest rate is still negative, given the inflation rate of 21 per cent.

Prof Uche Uwaleke said the hike is not good news for struggling businesses in Nigeria and for output growth in general.

He argued that in view of the pause in inflationary pressure, declining GDP growth, ongoing implementation of cash withdrawal limit, which will ultimately reduce the money supply, and the fact that supply-side factors are major inflation drivers in Nigeria, the MPC should have maintained the status quo.

He further noted that with this development, banks may have to re-price their loans which may further jeopardize their risk assets and worsen asset quality.

An economic analyst and human rights crusader, Eze Onyekpere, described the consistent hiking of rates in the name of fighting inflation as evidence that Nigeria’s economic managers have run out of ideas.

Onyekpere said the increase might not be necessary this time around because there is so much monetary policy rate can do in terms of tackling inflation.

According to him: “There should be other methods of trying to bring down inflation and this will require proper economic policies and Fiscal governance and economic management beyond simply increasing the monetary policy rate at every meeting of the MPC.

“You are aware that the CBN itself printed N23.7 trillion in the last seven to eight years which they pumped into the economy in the name of ways and means. When you are printing money not backed by value and simply pumping it into the system, what exactly are you doing, fueling inflation.”

Onyekpere who is also the Lead Director of the Centre for Social Justice (CSJ), said the naira has continued to lose value as it depreciates against international currencies because Nigeria is not producing much to earn foreign exchange, adding, “So we keep bringing inflation as a result of our importation of goods from other countries.”

Source: guardian

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