People & Money

The MPC Doves Win: CBN Maintains 11% Interest Rate Despite Rising Prices

“But have the MPC members asked from their friends in Nigerian banks if they would be willing to lend to boost economic activities and growth amidst so much uncertainty stemming from the CBN’s forex management policies and at rates below the inflation rate?”

At its first meeting in 2022, members of the Monetary Policy Committee (MPC), maintained the benchmark interest rate at 11.5% despite the surge in the prices of goods and services across the country.

All indicators of inflation rose in February 2022 as a result of an increase in the pricing of essential items across the country. The Consumer Price Index (CPI), which represents the average price of goods and services purchased by households, increased to 15.70% in February from 15.60% in January, owing to an increase in the price of diesel, gas, and other petroleum products. The situation was exacerbated by the nationwide power outage.

The Central Bank had a tough decision on interest rates, as the monetary policy committee was torn between pursuing price stability by raising interest rates and taking a dovish stand, i.e. refraining from raising the interest rate.  The doves on the MPC won; the majority of MPC members voted to keep the monetary policy rate at the current 11.5%, thereby opting to take a wait-and-see approach on the trajectory of inflation and the economy in the next few months.

The central bank governor, Godwin Emefiele, stated after the meeting that the upward trend of inflation could be short-lived as the recent surge in Nigerian inflation mirrors that of advanced economies, where a recent rally in energy prices and commodities has been triggered by President Putin’s invasion of Ukraine.

 Why the CBN maintained its current benchmark interest rate

Since the Central Bank of Nigeria lowered the benchmark interest rate from 12.50% to 11.50% in 2020 to stimulate borrowing and investment and thereby mitigate the impact of the coronavirus pandemic on the Nigerian economy, the impact of this decision on inflation and other economic indicators such as and the exchange rate has been mixed.

While the composite food index, which measures the average change in the price of food items across the country, has fallen by 4.68%, from 21.79% last year to 17.11% in February 2022, other indicators such as the value of the naira against the dollar have depreciated by more than 50%  over a year, driving up the prices of imported items into the country.

Also Read: CBN Retains Key Lending Rate After Facing Policy ‘Dilemma’

The CBN has identified imported inflation and other structural issues as causes of the price surge. In addition, the MPC believes that the recent increase in global energy prices and imported grains such as wheat and corn was sparked by geopolitical tensions triggered by Putin’s war on Ukraine. Given Nigeria’s inability to control the effects of global and domestic inflation drivers, the MPC decided that it was better to adopt a wait-and-see approach to assess how inflation performs in future periods.

Furthermore, inflationary pressures in Nigeria are influenced by structural and supply factors such as insecurity, a poor road network, erratic weather patterns, scarcity, and a weak macroeconomic environment when compared to advanced economies such as the United States, where an expansion in money supply and strong consumer demand triggers inflation. As price increases in Nigeria are typically caused by supply-side factors, a thorough and concentrated policy action by the apex bank and FGN would be a preferable alternative to managing the growing inflationary pressures. I believe the monetary policy committee’s decision to keep the existing interest rate was due to the little impact the benchmark interest rate has had on managing inflation in Nigeria over time.

We noted that there was a mixed decision by the committee members regarding the interest rate decision following the two-day bi-monthly MPC meeting, as six members of the committee voted to keep the current rate at 11.5%, while four others voted for a 0.25% – 0.50% hike in the current interest rate. To that end, we anticipate that analysts and other financial market participants will keep an eye on the MPC decision at its next meeting.

 Why You Should Care

The monetary policy rate (MPR) also called the benchmark interest rate is the minimum cost of lending and borrowing in a country established by the central bank in consultation with a team of committee members known as the “Monetary Policy Committee (MPC)” in Nigeria or the “Federal Open Market Committee (FOMC)” in the United States. The interest rate is a key monetary policy tool used by central banks to regulate the volume of money supply, which is one of the primary drivers of inflation in an economy.

The CBN’s decision to keep the interest rate steady at 11.5% while maintaining other policy instruments like the cash reserve ratio (CRR) at 27.5% and the liquidity ratio at 30%  reflects the apex bank’s objective of pursuing full economic growth as the current policy rates make it cheaper for businesses to access loans and other credit facilities.

As economies such as the United States, the United Kingdom, and neighboring African countries such as Ghana raise interest rates, the CBN’s decision to maintain the benchmark interest rates may have little impact on Nigeria, which is already experiencing a massive outflow of foreign portfolio investment due to lingering forex bottlenecks. The MPC’s decision to take a wait-and-see position on interest rates seems an attempt to avoid the worst of two worlds – if Nigeria isn’t attracting portfolio inflows because of atrocious foreign exchange policies, the country has little to gain from hiking interest rates. But have the MPC members asked from their friends in Nigerian banks if they would be willing to lend to boost economic activities and growth amidst so much uncertainty stemming from the CBN’s forex management policies and at rates below the inflation rate?

Yunus Ibrahim

Yunus advocates for mission-driven, underrepresented founders, particularly women, first-generation entrepreneurs, and people of colour. With over 3 years of experience in Venture Capital, ESG, Corporate Finance, and Research, Yunus has gained insights into various markets in Sub-Saharan Africa and worked with diverse founders to build the prosperous African continent we all desire. He received a bachelor's degree in Accounting from the University of Lagos; and was 1 of 60 African scholars selected to study Technology, Entrepreneurship, and Design at the Nigerian University of Technology and Management (NUTM) on a full-ride scholarship.

Related Articles

Back to top button
Arbiterz

Subscribe to our newsletter!

newsletter

Stay up to date with our latest news and articles.
We promise not to spam you!

You have successfully subscribed to our newsletter

There was an error while trying to send your request. Please try again.

Arbiterz will use the information you provide on this form to be in touch with you and to provide updates and marketing.