Why the CBN has hiked interest rates to support economic growth – The Sun Nigeria

Interest rate is one of the primary tools deployed by central banks around the world to manage money flows and productivity in their respective jurisdictions. A change in the interest rate could have ripple effects on the macro economy and other key economic indicators like consumer spending and borrowing.

For two and a half years, the Central Bank had kept the monetary policy interest rate at 11.5%, but finally made the difficult decision to raise the lending interest rate by 13%, apparently to rein in the rate inflation rate while leaving other monetary policy parameters intact, including the liquidity reserve requirement (CRR) and the liquidity ratio (LR) of the apex bank, unchanged at 27.5% and 30%, respectively.

Members of the CBN’s Monetary Policy Committee voted six out of eleven members to raise the borrowing rate. The thin margin separating “no” from “yes” showed that the idea of ​​raising interest rates might not be very popular, even among members of the monetary policy committee.

The unexpected increase in the interest rate immediately attracted flak of the Manufacturers Association of Nigeria. The group described the measure as not favorable to manufacturers. Some analysts also agree with MAN and have repeatedly questioned the rationale, timing and merits of the CBN’s interest rate hike.

Critics of the new interest rate regime argue that raising interest rates will kill the already stifled manufacturing sector. They argue that the measure will push inflation beyond the roof rather than curb it. According to Vivian Ojadi, a Nigerian-born economic analyst based in the United States, what the country needs now is not a policy that will make an already bad situation worse. “Manufacturers will need access to credit at low borrowing rates to stay in business and not otherwise because a huge chunk of manufacturing activity requires huge capital funding,” she said.

However, in announcing the MPC’s decision to raise interest rates at the post-MPC briefing in Lagos, CBN Governor Mr. Godwin Emefiele stressed that the move was aimed at curbing the rise in interest rates. inflation to prevent it from stunting growth. The CBN Governor explained that while MPC was aware that raising rates could hurt manufacturing output, the apex bank is also aware that an aggressive move in inflation could retard growth.

He said: “As you have all noticed, globally since the beginning of the year, the level of inflation has increased. To the extent that we see today, even in developed economies, the fact that even due to rising inflation, supply chain issues and the like, even most of these developed economies are already facing the threat of recession.

Specifically, he noted that with inflation in the United States rising from 2.5% in 2020 to 9.1%, according to the latest data, the Federal Reserve has had to raise rates four times this year alone.

Similarly, according to him, “in Egypt, the monetary authority raised its rates three times this year because in 2020 the inflation rate was 7.3% and today it is 13.2%. Ghana has increased the rate three times this year; inflation (in Ghana) has fallen from 7.8% in 2020 to 30%.

Emefiele, who pointed out that some of the world’s advanced economies, such as the United States and the European Union (EU) have suffered massive declines in production, said that with the United States registering negative production in the first quarter of this year, there was real fear that if the world’s largest economy recorded a second drop in output in the second quarter of 2022, it would fall into recession, a development that would negatively impact the global economy.

According to him, concern over soaring inflation and its impact on growth is such a serious problem all over the world right now that MPC members have not even bothered to consider options for maintaining or reduction of the MPR during their meeting.

The CBN Governor said: “Spiking inflation is a very serious matter that MPC members take very seriously because what you see is that as inflation continues to climb aggressively, it would undoubtedly begin to stunt the growth of any economy.

“While in Nigeria, which we have done in our own attempt to pursue a policy of price stability conducive to growth, we have tried over the past two (MPC) meetings to leave rates as they are , while at the same time, we have placed great emphasis on how to improve production growth.

As he said, “In 2020, inflation in Nigeria was 12.13%, today the latest data released puts inflation at 18.6%. MPC members believe we can’t just hold rates, we can’t just keep watching inflation grow as it rises; something must be done to contain inflation.

“We carried out a very serious analysis, looking at the various data that were presented and we felt that it was necessary to get inflation under control, not only because we want to look at what other economies are doing, but also because that we need to do a lot more work on inflation, and that’s why MPC hasn’t even considered whether to keep rates constant or ease them.

The CBN Governor further stated that while MPC members were aware that some analysts did not expect the committee to tighten up in a second consecutive meeting on the grounds that such a move would increase the cost of borrowing and also weaken manufacturing output, the committee would continue to tighten if inflation continues to rise.

He said: “The important thing is that as long as we see inflation at a level that can stunt growth, it needs to be addressed, while looking at how to use development finance tools to push for improved production. growth. We are doing that and at the same time I want to signal that the MPC is very determined that if inflation continues at this rate, in a particularly aggressive way, we would continue to tighten.

However, reacting to the MPC’s decision, analysts at CSL Research warned that a perpetual rate hike could hamper the country’s fragile economic growth. The analysts, in a note released over the weekend, said: “The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has unanimously raised the MPR from 13.0% to 14.0 %, the second consecutive increase and a cumulative increase of 250 basis points. within three months.

“With the current narrative on inflation, the committee was of the view that neither maintaining nor easing policy parameters was an option, given the impact of mounting inflationary pressures, which could begin to erode the moderate gains achieved in improving consumer purchasing power.

“We remain of the view that a continued rise in rates will likely limit the country’s fragile growth while achieving very little in terms of fighting inflation and attracting foreign flows.”

The previous 150 basis point hike in the policy rate had no significant impact on the inflation figures. On the contrary, the general price level has become even higher.

Despite the doubts expressed about the rate hike by some analysts, the consensus in industry circles is that the CBN is right to deploy traditional monetary policy tools to fight the savings-eating monster. From the tone of the CBN Governor’s speech, it seems that the apex bank will not relent until it wins the battle against inflation.

Stephen V. Lee