CBN 17.5% interest rate hike could boomerang on the economy – experts

CBN 17.5% interest rate hike could boomerang on the economy – experts

Contrary to analysts’ expectations, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) yesterday increased the primary lending rate by 100 basis points (1%), from 16.5 to 17.5%. 

The committee cited the state of the economy amidst the high inflation rate as the reason for the continuous adoption of its hawkish stand.

“The MPC was of the view that although the inflation rate moderated marginally in December, the economy remained confronted with the risk of high inflation with adverse consequences on the general standard of living. The Committee, therefore, decided to sustain the current stance of policy at this point in time to further rein in inflation.”

While the monetary authority holds that the move is intended to rein in inflation, economists believe it will boomerang the economy. 

Increasing interest rates as a response to high inflation is a common monetary policy tool used by central banks to help curb inflation. The idea behind this is that by raising interest rates, it becomes more expensive for individuals and businesses to borrow money, which in turn can lead to a decrease in spending and investment, and ultimately slow down the rate of inflation.

However, raising interest rates can also have negative consequences, such as slowing down economic growth, making it more expensive for businesses to borrow money, and making it harder for consumers to access credit. These negative effects can make the country less attractive to foreign investors and less stable for domestic businesses

A lecturer of economics, at Bayero University, Dr. Charles Igboga, said the interest rate increase will have an impact on the cost of doing business and by extension, the rate of inflation. He said the interest rate for customers of commercial banks will get higher than what it was.

“What it means is that the lending rate will rise henceforth. This will naturally increase inflation because it will drastically affect the cost of production, and there’s no way any enterprise will sell below production cost. The CBN is hoping that increasing the primary rate will help to reduce inflation, but on the contrary, it always leads to inflation,” he said. 

The quest to bring down the inflation rate is somewhat of a conundrum for the apex bank as increasing interest rates to achieve moderation could also slow down the country’s GDP growth rate.

An economist, Moses Kemakolam, said the CBN’s rate hike would hurt the productive sector and by extension, the wider economy. He stated that the apex bank’s decision to increase the rate in the past had not yielded meaningful results. 

“The MPC believes that consistent increases in the interest rate caused the slight easing of inflation in December 2022 and that further increases will stem inflation in January and after. However, the reality is that continuous increases in interest rate will stifle the productive sector and cause a default on loan facilities’ repayment due to factors like an insufficient supply of energy. 
“Insecurity and other rising production costs have affected most companies’ profitability. This interest rate hike would also limit the capacity of the industrial sector to take more loans for expansion. 
“The economy is already challenged in 2023 due to election anxiety and possible inactivity of the incoming government to save the economy through the year. The CBN’s increased rates will further hurt the economy in 2023,” he said. 

Despite these concerns, the central bank is unlikely to budge as it considers inflation a far more problem than the consequences of a temporary hike in inflation rates despite its effects on ordinary Nigerians.

For example, most companies have resorted to shrinkflation, a term for selling the same item at a higher or same price but in smaller volumes.

Others have introduced sachetization which is basically selling products that would ordinarily have passed for larger packaging but are now converted into sachets. These actions make life even more difficult for ordinary Nigerians, who as the final consumers, have to bear the brunt of monetary policies.

Dr. Biodun Adedipe, the founder and chief executive of B. Adedipe Associates Limited (BAA Consult), recently remarked that interest rate adjustments will be an unending cycle that will make corporates and households poorer.  

“If the interest rate is escalated, as is the case now, it means the cost of funding will be high, which will be passed on to consumers, increasing the prices of goods and services.”

Also reacting, the chief executive officer of the Centre for the Promotion of Private Enterprise, CPPE, Dr. Muda Yusuf, said CBN’s hike in MPR from 16.5% to 17.5% would hurt investors in the real economy. 

He said the implication is that lending rates will increase for investors indebted to the banks adding that the hike would further imply an increase in operating and production costs, which would ultimately impact adversely on economic growth.
Challenges to access and cost of credit by small businesses would be further elevated.  

But do monetary policy actions realistically affect the inflation rate in Nigeria? Is there anything the central bank can do to bring down rates?

Historically, Nigeria’s inflation rate challenges have been supply-side rather than demand push suggesting that the issue is beyond rate hikes.

For example, the central bank cannot use rate hikes to combat the effects of fuel scarcity, insecurity, logistics challenges, etc.

An economist and social affairs analyst, Ben Atuma, said monetary policy tightening has a minimal impact on inflation. He noted that Nigeria is not a credit-driven economy.

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

Nairametrics reported last week that experts warned that pegging the interest rate above 16.5% may rattle the economy with serious consequences for particularly the manufacturing sector and the banking industry.

The apex bank will point to a lower year-on-year inflation rate for the month of December as a sign of progress.

“Members welcomed the recent deceleration in year-on-year headline inflation, noting that the persistence in policy rate hikes over the last few meetings of the Committee had started to yield the expected decline in inflation. The Committee thus deliberated on either to hike rates further or hold for the impact of the last four rate hikes to continue to feed through.”

But could this be a precursor to a new forex policy? Also reacting to the CBN’s rate increase, Reuters News Agency quoted Razia Khan, Standard Chartered managing director, and chief economist, Africa, and the Middle East as saying,

“Our immediate read on this is that the CBN is showing more anti-inflation resolve, and preparing the way – perhaps – for an eventual FX policy liberalization that will require a reset to higher market rates.” 



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