Expert Urges CBN to Halt Interest Rate Hikes

The Centre for the Promotion of Private Enterprise (CPPE) has issued a call to the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to refrain from further increasing interest rates. This appeal comes ahead of the 299th MPC meeting scheduled for Tuesday and Wednesday.

Dr. Muda Yusuf, the Chief Executive Officer of CPPE, has articulated the need for a pause in interest rate hikes. He argues that such a pause would give fiscal policy measures a chance to effectively combat inflation. “My expectation from the MPC meeting is to maintain a hold; however, my preference is to begin relaxing some of the tightening measures due to the excessively high interest rates,” Yusuf stated. He is against any further increases in the Monetary Policy Rate (MPR) or the Cash Reserve Ratio (CRR), believing it’s time to let fiscal policies address the inflation issue.

Economic Implications of Current Interest Rates

Yusuf pointed out that the current high interest rates are detrimental to the manufacturing and real sectors of the economy. He detailed how these rates are obstructing investment, job creation, and entrepreneurial activities. “In the worst-case scenario, there should be a pause in rate hikes. However, my preference is to begin relaxing some of these tightening measures to provide relief to the real economy,” he elaborated.

Inflation Drivers and Fiscal Policy Role

A substantial part of Nigeria’s inflation, according to Yusuf, stems from supply-side issues like energy, production, and import costs. He emphasizes the critical role of fiscal authorities in managing these costs. He advocates for more robust fiscal policy interventions to address energy, import, and transportation costs, which are significantly influenced by energy expenses.

Looking at the global scenario, Yusuf remains optimistic about energy costs, especially with U.S. policies under President Donald Trump influencing the market. He notes that a favorable outlook for energy could potentially lower the prices of crude oil, PMS, diesel, and gas, particularly with peace efforts in Ukraine and Russia. This scenario might reduce revenue for Nigeria but could be beneficial for businesses by lowering operational costs.

Recommendations for Economic Management

Yusuf also stressed the importance of strategic fiscal management to prevent overheating the economy. He suggested that the Nigerian government should provide incentives to the real sector to cut down on costs. “We should also manage our fiscal operations well to avoid overheating the economy from the fiscal side,” he added, highlighting the balance needed between monetary and fiscal policies to achieve economic stability.

In conclusion, the CPPE’s stance, as articulated by Dr. Muda Yusuf, is clear: a pause in monetary tightening is essential for allowing fiscal measures to take effect, potentially steering the Nigerian economy towards recovery by addressing the root causes of inflation through more direct and impactful interventions.

What you should know

• The current interest rate stands at 27.5 percent, while the inflation rate is 34.6 percent.
• The MPC meeting is a crucial event that shapes Nigeria’s economic outlook, influencing decisions on interest rates, inflation control, and overall macroeconomic stability.
• The recent report from the CBN revealed the composite Purchasing Managers’ Index (PMI) for January 2025, at 50.2 index points, signaled an expansion in economic activities for the second straight month.
• The breakdown of the index showed that composite output, new orders, and employment levels recorded growth at 50.9, 50.2, and 50.2 points, respectively, reflecting overall expansion during the review period.
• The composite stock of raw materials declined to 49.8 points, and the suppliers’ delivery time slowed further to 49.6 index points, suggesting delays in supply chains.

Why Purchasing Managers’ Index (PMI) is important when shaping monetary policies

The PMI Index (Purchasing Managers’ Index) is an economic indicator that measures the health of the manufacturing and services sectors. It is based on surveys of purchasing managers in various industries and provides insight into business conditions, including new orders, production levels, employment, supplier deliveries, and inventories.

Purchasing Managers’ Index (PMI) provides real-time insights into economic activity, allowing CBN to adjust policies to support economic stability and growth.

PMI is a leading indicator, meaning it signals economic trends before official GDP or employment data is released. This helps central banks react proactively rather than waiting for delayed reports or rebasing activities.

• PMI > 50 and rising: The economy is growing → Central bank may consider raising interest rates to prevent overheating.
• PMI < 50 and falling: The economy is slowing → Central bank may cut interest rates to encourage borrowing and spending.
• PMI = 50 The economy is stagnant → Central bank may maintain current interest rates.

With the inflation rate at 34.6 percent, and the composite PMI for January at 50.2, together with the composite output, new orders, and employment levels also above 50, this indicates a growing economy coupled with rising inflation. This suggests that the CBN might raise interest rates. Experts like Dr. Muda Yusuf are warning such an increase will distort economic growth by making the cost of borrowing more expensive, even though this implies high yields in the securities markets, thereby attracting investors, this could slow down economic expansion and hinder future growth in the economy. Government spending has increased with President Tinubu increasing the 2025 budget to N54.99 trillion, also taxes will be reduced with the implementation of the new tax reform bills. All these will be taken into consideration by the CBN in deciding the MPR to ensure monetary and fiscal policies align together ensuring stability and growth in the economy.

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