As the Central Bank of Nigeria (CBN) scheduled Monetary Policy Committee (MPC) meeting begins Monday, analysts have made projections about possible resolutions of the committee.
While some economic experts forecast a hike in the Monetary Policy Rate (MPR) to tighten inflation, some forecast a hold of the benchmark interest rate to avoid disruption.
The CBN at its last meeting raised the MPR significantly by 400 basis points to 22.75 per cent from 18.75 per cent amid soaring inflation.
The bank also made changes to the asymmetric corridor around the MPR, setting it at +100/-700 basis points from +100/-300 basis points.
|
---|
Additionally, the CBN increased the Cash Reserve Requirement (CRR) to 45 per cent from 32.5 per cent and maintained the Liquidity Ratio at 30 per cent.
Judging by the stance of the committee at the last meeting, analysts say that a rise in the benchmark rate may not come as a surprise. In the personal statement of the committee, six of the 12 members voted to increase the rate by 400 basis points, three voted to increase by 300 basis points, and one voted for a 100 basis point increment.
CBN Governor Olayemi Cardoso, who doubles as the chairperson of the committee, voted to raise the rate by 425 basis points and another member of the MPC, Aloysius Ordu, voted higher raise at 450 basis points.
“A substantial hike in interest rate at this time will moderate inflationary pressures in the short- to medium-term. It will also send a strong signal to investors (domestic and foreign) about the MPC’s intention to build and sustain trust and credibility in monetary policy in line with its core mandate of price stability,” Mr Ordu said in his statement.
In his view, Olumide Adesina, a Financial analyst at Quantum Economics, suggests that increasing interest rates by 100 basis points could attract more foreign investments to naira-denominated assets, boosting FX inflows and stabilizing the FX market.
“The CBN will likely push rates higher by at least 100 basis points to further allure FPIs to naira-denominated assets, particularly at the money markets which could further translate to more FX inflows and near-term stability as seen in the FX market,” he said.
Also, Ayodeji Ebo, Managing Director of Afrinvest Securities Limited, said the CBN might raise rates by 100-200 basis points due to persistently high inflation. He said once stability is achieved, the committee could consider rate cuts.
“The CBN may further hike the rate given that the inflation rate is still high and also looking at the voting pattern the last time, so I am expecting to see maybe 100-200 basis points increase.
“Yes, this may increase the cost of borrowing however, the interest on fixed-income investment will also go up. Their target is to reduce the negative real return and reduce speculation on FX, so now… people will look at it that if I can get 25 per cent on treasury bills, can the naira depreciate by another 25 per cent this year? So those are the considerations that will be hard,” Mr Ebo said.
On the contrary, Paul Alaje, Chief Economist at SPM Professionals, said increasing interest rates to combat inflation could worsen the country’s situation by raising borrowing costs and reducing employment opportunities.
“The last figure released by the Bureau of Statistics revealed unemployment increased significantly more than 20 per cent of the previous rate i.e if the previous was above 4 per cent, this is not above five per cent of people who can not get a job for an hour a week.
READ ALSO: CBN reiterates directive to banks on utilisation of forex gains
“Properly speaking those who can not get a job for 40 hours are more than 40 per cent of the labour force. By implication, if you further increase the interest rate or you further tighten by adjusting either CRR or MPR or the liquidity ratio, all of these will have issues regarding investment in Nigeria,” Mr Alaje said.
He said the recent 400-basis point increase needs time to show its impact, so holding rates steady for three to six months would be prudent to assess the situation and prevent further harm to the economy.
“Therefore, what I think the committee should do is, at best, hold the rate constant because it is too short a time to see the impact of the recent increase, but holding the rate for the next three and more comfortably to six months will let us know the impact of the sudden increase by 400 basis point,” he said.
Kalu Aja, a financial education instructor, explained that the CBN will closely monitor inflation and adjust the MPR accordingly.
“CBN has said it will do “inflation tracking” and move back to traditional central banking. This means if inflation rises, MPR will also rise to reduce the money supply in the economy.
“A hike in MPR means small businesses and consumers will see the cost of business rise and the economy slow, but that’s the point,” Mr Aja said.
Support PREMIUM TIMES' journalism of integrity and credibility
At Premium Times, we firmly believe in the importance of high-quality journalism. Recognizing that not everyone can afford costly news subscriptions, we are dedicated to delivering meticulously researched, fact-checked news that remains freely accessible to all.
Whether you turn to Premium Times for daily updates, in-depth investigations into pressing national issues, or entertaining trending stories, we value your readership.
It’s essential to acknowledge that news production incurs expenses, and we take pride in never placing our stories behind a prohibitive paywall.
Would you consider supporting us with a modest contribution on a monthly basis to help maintain our commitment to free, accessible news?
Make ContributionTEXT AD: Call Willie - +2348098788999