The Central Bank of Nigeria (CBN) has increased the benchmark interest rate, also known as the Monetary Policy Rate (MPR) by 400 basis points to 22.75 percent for the first time in eight months from 18.75 percent in order to rein in inflation.

The MPC adjusted the asymmetric corridor around the MPR to +100/-700 from +100/-300 basis points.

This technically means that the borrowing cost will go up, which may not augur well, albeit in the immediate, with the real sector of the economy as it will reflect on the prices of finished products.

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Also, the Monetary Policy Committee (MPC) of the CBN, chaired by the Governor, Olayemi Cardoso at the end of its 293rd meeting on Tuesday, raised the Cash Reserve Ratio (CRR) to 45 percent and retained the Liquidity Ratio at 30 percent.

In a swift reaction, Professor Uchenna Uwaleke, Director, Institute of Capital Market Studies, Nasarawa State University, Keffi, described the hike in MPR as an overkill, stressing that the outcome of the MPC is not a welcome development.

Professor Uwaleke argued that the CBN would have increased the MPR by not more than 200 basis points since the MPC members would have another opportunity to meet next month and review the impact.

He highlighted that with this overkill on the economy in a bid to crash elevated inflation which has numerous non-monetary factors driving it, output is bound to shrink.

Professor Uwaleke stated, “On the February 2024 MPC decision, jacking up the MPR by 400 basis points in one fell swoop is simply an overkill.

“Why not by not more than 200 basis points since they have another opportunity to meet next month and review impact?

“They didn’t stop at MPR, they also jack up the CRR to 45 percent, which at the previous level of 32.5 percent was among the highest in Sub-Saharan Africa.

“The CBN Governor had assured that policies of the bank would be evidence-based. Which empirical results support this aggressive move?

“I pity the real sectors of the economy.

“The implication is that for every deposit in the bank, CRR takes 45 percent of it while liquidity ratio takes 30 percent. So it is only 25 percent of the deposit that banks can lend!

“This has negative implications for access to credit, cost of capital for firms, cost of debt service by the government and asset quality of banks.

“Expect banks to quickly reprice their loans with negative consequences for non-performing loans and financial soundness indicators.

“By this overkill on the economy in a bid to crash elevated inflation which by the way has numerous non-monetary factors driving it, output is bound to shrink.

“So, expect lower GDP numbers especially from agric and industry sectors as well as a surge in unemployment levels. This is not a welcome development”.

Also reacting, the Chief Economist and Partner at SPM Professional, Paul Alaje, noted that the latest monetary policy will have adverse multiplier effects on the country’s economy.

He said: “Businesses that are on banks’ facilities (loans) should brace up for rates adjustment in the short-term. This may further push costs up and, in case of transferable burden, this costs may be passed to the consumers.

“Employment will be crowded out (that is, unemployment will increase, this is expected within the next quarter).”

Kingsley Moghalu, former Deputy Governor of the CBN, while reacting via his X handle lauded the MPC hike of the MPR, explaining that if the country is to control inflation, the move is commendable.

Moghalu said, “Correct move by @cenbank Monetary Policy Committee to dramatically hike the Monetary Policy Rate by 400 basis point to 22.5 %. The situation calls for nothing less if we are to check inflation over 12-18 months. We did the same a decade ago to bring inflation from 14% to 8%.

“It will hit businesses hard, but inflation is hitting harder. We must slay the inflation dragon lest it consume our economy and we head to Zimbabwe/Venezuela. The money supply must be reduced. Price stability must take priority before economic growth in the current situation”.

Cardoso also announced the adoption of inflation targeting framework to be used henceforth to control the rising inflation.

Announcing this, the CBN Governor urged Deposit Money Banks (DMBs) to increase their capital base to be able to withstand the headwinds.

The MPC chairman said the “Gross external reserves stood at $34.51 billion on February 20, 2024, compared with $32.23 billion at end-January 2024” and stressed that the improvement was driven by reforms in the foreign exchange market and an increase in oil production, amongst others.

Cardoso said, “Policies have been coming out; tolerance for people not to abide by the regulations that are coming out, and to comply is zero. People will have to abide by those regulations, and those that do not will face the consequences for not doing so. As we look to what has happened in the past, I can assure you that a very thorough exercise is going on to identify what needs to be done.

“In the meantime, we are going to continue to make the market more liquid and to ensure that those who are genuine and really want to abide by the rules and regulations that have been set by the CBN will be free to do, those who do not should be ready to face the consequences.

On the outstanding $2.2 billion FX commitment, Cardoso stated, “In terms of the backlog, we are committed to clearing the backlog of identified and genuine requests that are pending. I can tell you that just today, we paid out another $400 million to those that have been so identified and we are committed to continue to do so. It is not in our interest to renege.”

The CBN Governor pointed out that the apex bank has the responsibility to protect Nigerians and this informed the collaboration with the fiscal authorities, which has been able to confirm that certain practices go on that indicate illicit flows going through a number of these entities, and suspicious flows at best.

“In the case of Binance, in the last one year alone, $26 billion has passed through Binance Nigeria from sources and users who we cannot adequately identify. There is a lot that is going on now as a result of collaboration between the different agencies, which include EFCC, the police and the office of the National Security Adviser.

“We are determined to do everything it takes to ensure that we take charge of our market, do not allow others to manipulate our market in a way that ends up distortional and suboptimises for all Nigerians. We will not accept it, and we will do everything possible to prevent any of this kind of infractions from taking place.”

Cardoso pointed out that the committee’s decisions were centered on the current inflationary and exchange rate pressures, projected inflation and rising inflation expectations.

He noted that members were concerned about the persistent rise in the level of inflation, adding that “the Committee, however, acknowledged the trade-off between the pursuit of output growth and taming inflation but was convinced that an enduring output expansion is possible only in an environment of low and stable inflation.

“Members noted the decision to transit to an inflation targeting framework as essential to addressing the persistence of inflationary pressures in the economy and commended the fiscal authority for their invaluable support,” he stated.

Cardoso noted that in the opinion of the Committee, the options available for decision were to either hold or hike the policy rate to offset the persisting inflationary pressure.

“Considering the option of a hold policy, the evidence revealed that previous policy rate hikes have slowed the rise in inflationary pressure but not to a desirable extent. Members considered various scenarios of hold and hike and concluded that inflation could become more persistent in the medium-term and thus pose more regulatory challenges if not effectively anchored. The balance of the argument thus leaned convincingly in favour of a significant policy rate hike to drive down inflation substantially”, Cardoso explained.

According to him, the MPC also deliberated extensively on various distortions in the foreign exchange market including the activities of speculators, putting upward pressure on the exchange rate with high pass-through to inflation.

“Members were, however, convinced that the ongoing reforms in the foreign exchange market will yield the desired outcome in the short to medium term. Some of these reforms include: the unification of the foreign exchange market; promotion of a willing buyer willing seller market; removal of all limits on margins for IMTO remittances; introduction of a two-way quote system and the broad reforms in the BDC segment of the market to restore stability, enhance transparency, boost supply, and promote price discovery in the Nigeria Autonomous Foreign Exchange Market (NAFEM).

“The committee reviewed the key financial indicators of the banking system and noted that the system remained stable. To further ensure the stability of the banking system, the MPC called on the bank to increase system buffers by recapitalising the banks to improve resilience against potential risks. Members further enjoined the bank to strengthen surveillance and compliance regarding its earlier guidance on the application of foreign exchange revaluation gains.

“The committee identified non-monetary factors driving inflation such as the persisting insecurity and infrastructural deficits and noted the role of fiscal policy in addressing these shortfalls, while reiterating the commitment of monetary policy support. In this regard, the Committee applauded fiscal policy initiatives towards reducing the cost of living for ordinary Nigerians, including the ongoing efforts to improve food supply and provide mass transit CNG buses to ease the cost of transportation; and the civil service reforms to improve the efficiency of government, amongst others,” Cardoso further explained.

On the issue of moving away from interventions, Cardoso said “The reason is not far- fetched. Everyone is talking about inflation, price stability, if that’s the concern of all, then why won’t we put everything that we have to ensure that we fight that monster.

“The intervention has two dysfunctions, it takes away a lot of time for something you do not have the expertise to do, and it also, if not carefully handled, creates a lot of distortion in the economy through inflow of money supply.

“The intervention that took place in the recent past was estimated in excess of N10 trillion. I am not talking about Ways and Means. What was the budget of the Federal Government of Nigeria and the budget of the largest state in Nigeria? Do the mathematics and it will tell you the extent of damage done to the economy.”

Cardoso said those interventions need to be monitored to ensure that they are brought in, stressing that the CBN could partner with those that have expertise on some projects.

In response to a question on whether the policies introduced by the CBN under his watch are responsible for the country’s economic challenges, Cardoso replied: ”I laugh at that question but it’s not a laughing matter and I think it is very important for Nigerians to understand that the Central Bank Governor; I and my team, are not responsible for the woes that we have today; we are part of the solution.

“We are determined to ensure that we work hard to get out of the mess that Nigeria is in. We assumed responsibility in a time of crisis of confidence; there was a crisis of confidence and you may all want to go to bed and wish that crisis of confidence was not there but it was, and we can’t turn back the clock.

“All we can do is do the difficult things to make a bad situation better and I do believe that the efforts that we are making are beginning to bring back confidence because to be frank, without confidence in your business, you are not going to get far.”

“If FAAC inflows and spendings do not impact the economy as expected, its combined impact with this adjustment in rates may lead to a financial distress in the system, given the reality of current economic quagmire. We have made our choices. However, economic choices have consequences,” he explained.

In a similar vein, a policy analyst, MS Ingawa, said: “The Monetary Policy Rate (MPR) is the rate the CBN lends to commercial banks. Commercial banks then use this rate as their benchmark rate for their lending.

“It simply means that loans in commercial banks and other lending institutions will be more expensive that it used to be and goods and services that rely on bank loans (which are the majority) will have to pay more to borrow money for production. Being cost of fund (Interest Charged on Loans) an integral part of production cost, the goods and services will be more expensive. Central Banks increase MPR when the inflation is high so as to limit inflow of money and credit into the economy.

“In the next few days, banks will notify their debtors of hike in interest rate on their existing loans,” he added.

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