Friday, June 9, 2023

New CBN interest rate will worsen inflation: Experts

It was the 6th consecutive time that the committee would hike the MPR, which was the baseline lending rate in the economy.

• March 22, 2023
Godwin Emefiele
Godwin Emefiele

Some practitioners in the financial sector have expressed concern that the hike in the country’s Monetary Policy Rate can worsen inflation.

The economic experts expressed their concerns on Wednesday against the backdrop of the recent decisions of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria.

The MPC in its 290th meeting held on Monday and Tuesday increased the lending rate by 50 basis points, from 17.5 per cent to 18 per cent.

It was the 6th consecutive time that the committee would hike the MPR, which was the baseline lending rate in the economy.

Muktar Muhammed, a financial analyst, opined that a hike in rates is not advisable now because of the naira shortage and what it has done to the economy.

Mr Muhammed said that inflation was already high, and hiking rates, together with the scarcity of cash, would not help the economy.

“The challenge with Nigeria is not just that we are dealing with an inflation that has to do with single-digits, we are also dealing with an inflation that is driven by three major factors.

“The factors are micro economy, demand and supply, and production. So, we will need a holistic approach which cannot just be saved by rate hike,” he said.

The expert advised that the apex bank should also consider the cost of borrowing in taking monetary policy decisions.

“In the area of micro economy stability, we need to begin to look at the cost of borrowing, if reduction in the cost of borrowing is going to help tackle inflation.

“Also, looking at the cost of production, we will begin to look at the power sector and the high cost of energy.

“On the side of the demand and supply, you know that a lot of goods are also being imported into this country and we are still battling exchange rate volatility.

“Inflation cannot be solved with just one tool, it needs to be looked at holistically, especially in the area of production, cost of doing business and micro economy stability that has to do with borrowing mostly for startups,” he said.

Okechukwu Iwegbu, a financial expert, said the hike in MPR will have a negative impact on the economy.

Mr Iwegbu, a past president of the Chartered Institute of Bankers of Nigeria (CIBN), said that the rate hike could make it difficult for people to raise capital for their businesses.

“Inflation rate, which is the major reason why the committee raised the MPR, will not abate. The MPC should look at several other factors like taxation.

“The tax rate is important because there are multiple taxes in Nigeria, from the Federal Government to state and local governments. Almost all government agencies are collecting taxes.

“The taxes should be harmonised so that many more Nigerians can be brought into the tax net. This will be more impactful on the economy,” he said.

Professor Uche Uwaleke, a professor of Capital Market at the Nasarawa State University, Keffi, said that the MPC was still concerned about rising inflation and the pressure in the forex market.

Mr Uwaleke said that this was against the backdrop of the committee’s primary mandate of maintaining price stability.

“However, I had expected MPC to maintain a hold position considering the significant drop in currency in circulation occasioned by the currency redesign policy.

“The adverse impact of the recent cash scarcity on productive activities as well as the conclusion of election season should have provided justification for a hold position,” he said.

The professor, however, said that the increase in the MPR by 50 basis points was a signal to financial markets that the CBN has begun the process of rate-hike pause.

“I expect that a complete halt in policy tightening will most likely happen at the next scheduled meeting of MPC in May.

“This is necessary in order to stimulate economic activities and create job opportunities,” he said.


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