….. Sparks Mixed Reactions From Financial Experts
Some financial analysts expressed concerns at the Central Bank of Nigeria’s (CBN) decision to raise the Monetary Policy Rate (MPR) by 50 basis points, despite signs of economic improvement.
In an exclusive interview with NewsNGR, the analysts warned that the hike would increase borrowing costs, strain businesses reliant on loans, and potentially hinder private sector growth.
In a surprising decision for the financial markets, the Central Bank of Nigeria (CBN) Monetary Policy Committee voted to increase the interest rate by 50 basis points, bringing the Monetary Policy Rate (MPR) to 27.25 per cent.
This announcement was made by CBN Governor, Mr Yemi Cardoso, who also serves as the Chairman of the Monetary Policy Committee after their recent meeting held in Abuja.
In addition to the interest rate hike, the CBN has raised the Cash Reserve Ratio (CRR) for commercial banks by 500 basis points, increasing it from 45 per cent to 50 per cent.
For merchant banks, the CRR has been increased by 200 basis points to 16 per cent. The Monetary Policy Committee also adjusted the asymmetric corridor around the MPR to +500 and -100 basis points, while the liquidity ratio remains unchanged at 30 per cent.
Governor Cardoso indicated that the decision to tighten monetary policy was reached unanimously by the committee members.
The CBN cited recent economic developments, particularly concerning inflation and the stability of the foreign exchange market, as the basis for this decision.
Factors such as food inflation, flooding in various regions, and rising prices for petrol and energy were highlighted as significant concerns prompting the need for further tightening of monetary policy.
Experts emphasized the need for fiscal intervention alongside monetary policy to curb inflation and support economic stability.
Analyst and Head of Research at FSL Securities Limited, Mr. Victor Chiazor, in an exclusive interview with NewsNGR expressed surprise at the recent decision by the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) to raise the Monetary Policy Rate (MPR) by 50 basis points, given the economic indicators observed before the meeting.
Chiazor noted that before the MPC meeting, the Nigerian economy had shown signs of improvement.
These included two consecutive months of declining headline inflation, steady growth in foreign exchange reserves, relative stability in the exchange rate, and a slowing down of interest rates, evidenced by the treasury bill stop rate dropping to 18.59 per cent in the last auction.
“These developments, along with other economic activities, suggested that we may have reached the end of aggressive inflationary pressure,” he said.
Chiazor added that it was expected the CBN would begin adjusting its monetary policy to support economic recovery.
While a policy shift was not anticipated immediately, the general expectation was for the MPC to maintain its current stance until the next meeting, allowing time to assess the economy’s response to the recent increase in the pump price of Premium Motor Spirit (PMS).
However, the CBN’s decision to raise the MPR is likely to have significant implications for the economy, particularly in terms of lending rates.
“This move is expected to increase the cost of borrowing, placing additional strain on businesses that are dependent on loans, and potentially making it difficult for the private sector to raise capital,” Chiazor explained.
The MPR serves as a benchmark for interest rates across the financial system, and an increase typically translates to higher borrowing costs for businesses.
Chiazor further noted that this decision could harm the performance of companies listed on the Nigerian Exchange.
“Profit margins for many companies are expected to be squeezed, as the higher cost of capital could lead to reduced profitability,” he said.
He emphasized that market sentiment is likely to shift in favour of the financial services sector, especially banks, which are expected to benefit from the rate hike.
In conclusion, Chiazor highlighted the importance of careful monitoring of the economy’s response to this policy shift, as it could have broad implications for growth and business performance in the coming months.
Director at Halo Nigeria Capital Management Limited, Mr. Paul Uzum also in a chat with NewsNGR provided insights into the recent monetary policy actions of the Central Bank of Nigeria (CBN).
He highlighted that the CBN Governor had previously committed to an orthodox or conventional approach to monetary policy, which focuses on raising interest rates as a means of combating inflation.
Uzum explained that this is the rationale behind the CBN’s decision to increase the Monetary Policy Rate (MPR), to reduce inflation to target levels.
“This approach mirrors what the United States, European Union, and the United Kingdom did between 2022 and 2023 when faced with rising inflation.
“After successfully reducing inflation, these economies are now gradually lowering interest rates,” Uzum stated.
He expressed confidence that Nigeria’s inflation rate would eventually align with this strategy.
Uzum elaborated that the elevated interest rates would help to curb liquidity in the economy, which in turn would sustain the downward trend in inflation.
However, he noted that while some sectors of the economy would benefit from this policy, others would face significant challenges.
“Monetary policies like rate hikes often have a zero-sum impact on the economy,” Uzum explained.
“Sectors with abundant liquidity, such as banks and companies with strong cash reserves, are likely to benefit.
“On the other hand, the real sector, including manufacturing, consumer goods, and industrial goods, as well as companies reliant on borrowing for operations, will be adversely affected,” He added.
Regarding the implications for the capital market, Uzum warned that the stock market is likely to react negatively to the news of rising interest rates.
“Higher interest rates make money market instruments, such as commercial papers, treasury bills, and bonds, more attractive to investors compared to stocks.
“As a result, we may see a shift in investment preferences away from equities,” he said.
Uzum stated that while the CBN’s rate hike is designed to address inflation, it will have diverse effects on different sectors of the economy, and investors should prepare for potential shifts in market dynamics as the monetary policy strategy unfolds.
President of the Association of Capital Market Academics of Nigeria (ACMAN), Professor Uche Uwaleke expressed confidence in the Central Bank of Nigeria’s (CBN) recent decision to raise the Monetary Policy Rate (MPR).
According to Uwaleke, the CBN often has access to critical information that may not be available to the general public, and this likely informed the Monetary Policy Committee’s (MPC) decision to tighten monetary policy further.
“I want to believe that the members of the MPC have the best interests of the economy in mind and have made this decision based on compelling evidence of significant threats to the exchange rate and inflation,” Uwaleke said.
He acknowledged that while the move may appear surprising or concerning to some, the decision is likely driven by strong data that underscores the need for caution in managing the country’s monetary policy.
However, Uwaleke stressed that monetary policy alone cannot solve the problem of inflation.
He called for a joint effort between the monetary and fiscal authorities to effectively combat rising prices.
“The task of taming inflation must be tackled collaboratively by both the CBN and the government. The government, for its part, needs to focus on controlling recurrent spending and prioritizing productivity, including increasing support for small businesses,” he explained.
Uwaleke emphasized the importance of comprehensive strategies, highlighting that a balanced approach between monetary tightening and fiscal discipline is crucial to achieving sustainable economic stability.
This includes reducing excessive government spending and fostering an environment that boosts productivity and supports the growth of small and medium-sized enterprises (SMEs).
Managing Director of Arthur Steven Asset Management Limited and former President of the Chartered Institute of Stockbrokers (CIS), Mr. Olatunde Amolegbe commenting on the CBN’s decision to raise the Monetary Policy Rate (MPR), stated that the move appeared inevitable given the CBN’s struggle to meet its inflation target of 21.5 per cent.
Amolegbe pointed out that the recent increase in fuel prices is likely to worsen inflationary pressures, making it necessary for the Monetary Policy Committee (MPC) to take preemptive action.
“The MPC seems to be acting proactively to address the potential rise in inflation due to higher fuel costs,” he noted.
He also referred to the CBN Governor’s acknowledgement that despite relatively high interest rates, real returns remain negative, which could deter foreign investment inflows.
“This is a clear signal of what to expect going forward,” Amolegbe said, highlighting that the CBN’s decision is likely to curb liquidity in the financial system and control inflation.
However, he also noted the downside of the policy, which could negatively impact production and employment levels in the economy.
Amolegbe emphasized the importance of fiscal policy in complementing the CBN’s efforts.
“The fiscal authorities need to step up their efforts to reduce the need for continued monetary tightening,” he stated.
He noted that a balanced approach between monetary and fiscal measures is crucial to achieving economic stability, without putting undue pressure on businesses and employment in the real sector.
Amolegbe stressed that while the CBN’s decision to raise interest rates is understandable given the current economic climate, more robust fiscal interventions are necessary to reduce the need for further rate hikes.
Managing Director of Highcap Securities, Mr. David Adonri stated that the recent 50 basis point increase in the Monetary Policy Rate (MPR) by the Central Bank of Nigeria was an inevitable move.
He noted that fiscal activities remain expansionary, and inflation continues to show little signs of moderation, despite the official figures released by the National Bureau of Statistics (NBS).
Adonri emphasized that without implementing fiscal austerity measures, the only viable option left to combat price instability is to continue tightening monetary policy.