Economy: Experts optimistic as CBN raises interest rate to 24.75%

  • $2.4bn ineligible FX backlog won’t be cleared, Cardoso vows
  • Says addressing food insecurity key to containing current inflationary pressures

The Governor of the Central Bank of Nigeria, Olayemi Cardoso has vowed not to pay what he described as an ineligible foreign exchange backlog worth $2.4 billion.

He made this disclosure while briefing journalists on the outcome of the 294th Monetary Policy Committee meeting that closed on Tuesday in Abuja.

Cardoso, at the end of the MPC meeting, said the Monetary Policy Rate otherwise known as the lending rate had been further raised by 200 basis points to 24.75 percent.

He explained that the continuation of the hawkish policy of the apex bank was to curb inflation which increased to 31.7 percent in February.

So far, Cardoso’s administration has paid its inherited backlog of $7bn, a statement signed by the CBN’s spokesperson, Mrs Sidi Ali, said Wednesday last week.

Meanwhile, Cardoso noted that the decision to increase MPR to 24.7 percent in March was driven by the committee members’ desire to control inflation using monetary policy instruments.

“We are not unmindful of the effect of the hike on Nigerians, but it is moderating prices in the forex market and it’s helping the Naira to regain its value which will also impact positively on the economy and the people at large.

“The key thing for us is to focus on managing the inflation rate.

“We expect that by the end of May inflation will begin to moderate,” he stated.

The CBN governor assures that once the economy stabilises there will be no need to increase interest rates.

Despite the hike in MPR, the cash reserves ratio of commercial banks was retained at 45 percent while the liquidity ratio remained at 30 percent. The asymmetric corridor is now +100 basis points -300 basis points around MPR.

However, the MPC adjusted the CRR of Merchant banks from 10 percent to 14 percent.

Experts’ view

Speaking on the CBN’s MPC decision to raise the country’s interest benchmark MPR by 200 basis points, an Abuja-based economist and Executive Director, African Centre for Leadership, Strategy and Development, Monday Osasah, said the hike as noted by the CBN governor is aimed at curbing inflation.

He, however, noted that the use of monetary policy as an instrument for the control of inflation must be matched with equal response by the managers of fiscal policies to achieve the desired results.

“Listening to the CBN governor, one can hear him say that the primary reason for raising the MPR by 200bps for the second time in less than two months is to combat inflationary pressures.

“The idea is to make borrowing more expensive; the Central Bank is assuming that by reducing consumer spending it can tame inflation. But the critical question to be asked in the current situation in Nigeria is whether the inflation we are now experiencing is driven by too much money chasing a few goods. It is obvious that the major factor driving inflation in Nigeria today is food inflation principally caused by insecurity, farmers/herders clash and the removal of fuel subsidies which has led to an increase in the cost of transportation of foodstuff,” he posited.

Osasah argued further, “The National Bureau of Statistics (NBS) put the inflation figures for February at 31.70 percent, but the MPC has now increased the interest rate to 24.75 percent implying that commercial banks will have to increase the interest rate. Therefore, entrepreneurs would have to pay higher interest rates at a time when they are even finding it difficult to sell their stocks due to the high cost of production.

“Managers of the economy must look at the issues on the ground holistically, the fiscal side of the economy must be up and doing to stimulate the economy by providing security for farmers to access their farmlands to drive down food inflation, provide energy and improve infrastructure.”

He noted that while higher interest rates are expected to attract foreign investment as government financial instruments become more attractive, the challenge with such a situation is that the real sector which creates economic growth and development will be neglected.

“The hike in interest rate will increase foreign investment in terms of portfolio investors but that should not be the priority in a time like this when over 130 million Nigerians are living below the poverty level.”

Osasah, however, pointed out that, “Higher interest rates can discourage speculative behaviour in asset markets, such as real estate or stocks, thereby reducing the risk of asset bubbles forming.”

Also reacting to the MPC decision, financial analysts at Cordros Securities Limited said they had anticipated that the committee would raise the benchmark interest rate by 200 basis points to 24.75 percent.

“However, contrary to our expectations of maintaining other parameters unchanged, the Committee narrowed the asymmetric corridor to +100/-300 basis points around the MPR (previously +100/-700 basis points) as part of its tightening measures. Additionally, the MPC adjusted the CRR for merchant banks to 14.0 percent from 10.0 percent while retaining the CRR for DMBs at 45.0 percent. The liquidity ratio was held at 30.0 percent.

“The committee highlighted that global risks to inflation remain significant, including ongoing geopolitical tensions and the likelihood of central banks in advanced economies maintaining high-interest rates for a more extended period due to inflation remaining above target levels.

“We anticipate a continuance in the disinflationary trend in developed economies, primarily driven by lower energy prices, a slowdown in consumer demand, and a higher base effect from last year. However, given that inflation remains above target levels, we do not expect central banks to begin rate cuts until the second half of 2024.

“For clarity, while headline inflation is expected to remain high year-on-year, we anticipate moderate increases in domestic prices on a month-on-month basis, primarily due to the stability of the naira, which could support a mild increase in the MPR. Consequently, we project a 100bps increase in the benchmark interest rate at the next meeting in May.”

Also commenting, Analysts at Financial Derivatives Company Limited, said, “The consideration for the jumbo rate hike was to rein in three-decade-high inflation by reducing excessive money growth and stabilizing the exchange rate. Money supply growth rose by 76 percent to N93.5 trillion in January from N53.3 trillion a year ago. The exchange rate also depreciated by 77 percent (YoY) in February.”

FDC Limited affirmed that since the last MPC meeting in February, the naira has firmed up, appreciating by 9.5 percent to N1475/$ from N1615/$ on the day of the meeting (February 27).

The strengthening of the naira was bookended by the scarcity of the naira which has moderated the demand for the dollar. Other factors include increased supply of forex exchange and sanitization of the FX market.

Average banks’ daily opening position, an indicator of system liquidity, declined substantially to N1 trillion (short) from N2.29 trillion (long). This was also buoyed by the aggressive mopping up of liquidity through OMO sales above N1 trillion, with one-year OMO bills selling at an interest rate of 21 percent p.a.

According to the CBN, foreign demand for short-term government risk-free securities also jumped to nearly 80 percent, leading to an astronomical increase in foreign portfolio investment to $1.15 billion in one month, from a monthly average of $96 million in 2023.