CBN Increased Interest Rate: Will Nigerian Inflation be Curbed?

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CEM ANALYSIS | The Central Bank of Nigeria on Tuesday, adjusted the nation’s interest rate from 11 percent to 13 percent at the end of the Monetary Policy Committee meeting according to the communique issued at the end of the May edition of the monthly meeting.

Usually, adjustment of interest rate is expected to have some impact in the economy either positive or negative. This time, according to CBN communique, MPC envisaged a moderating impact of tightened interest rate on rising inflation.

As is generally understood, MPR is the benchmark rate at which CBN lend money to Banks. When the rate is high, it reduces the ability to get more money from CBN when there is need. This then is expected to constrain the banks from lending as much to the public as they would have.

This is so since at high price of money which is the interest rate from CBN, Banks will in turn lend to borrowers at high interest rate which is expected to discourage peoples from borrowing, with this, the volume of money in circulation will reduce and weaken ability to purchase goods and services. This is expected to lower inflation

It is also a way to control exchange rate since scarce foreign currency is being chased by higher volume of Naira.

Chief Analyst at Continental Economy Magazine, Alex Anameje corroborate CBN’s inflationary consideration, he says “the Central Bank of Nigeria’s adjustment of the monetary policy rate upwards from 11% to 13% is expected. This obviously follows the rising inflation rate. With inflation rate going above the CBN’s target range of 6%-9% and reaching the eight month high of 16.82% in April 2022, it became imperative that the CBN should adjust the monetary policy rate and this incidentally is the biggest rate hike since July 2016.”

However, there is serious concern regarding how much impact this new rate will actually have on the rising inflation following the peculiar circumstance surrounding the Nigerian economy. Will this rate lower inflation or exacerbate it”

The application if interest rate as an instrument for the control of inflation is usually effective in a stable economy. In fact, according to Anameje, interest rate is actually supposed to be positive in real terms in a stable economy, but that cannot be said of the Nigerian economy.”

This corroborate Gabriel Imomoh’s fear about the possible fallout of the recent rate hike having observed that “inflation has not obeyed interest rate in Nigeria following his full understanding of the imbalances and constrains that fuel inflation in the country.

Gabriel Imomoh, who is an Analyst at Continental Economy Magazine and Senior Consultant at PearGrade Consult, said Nigeria is an import dependent nation.”

A deep look at the types of inflation with regard to economic situations that trigger them, Nigeria’s inflation is not a demand – pull inflation that interest rate can substantially affect. Demand – pull Inflation occur in an economy where unemployment is at its lowest and were wages are at the optimum.

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Is there too much money chasing fewer goods in Nigerian or rater high price of goods and service is mounting pressure and shrinking the value of the average consumer’s income? From this perspective, is it not more appropriate to classify Nigeria’s inflation as a cost – push inflation and imported inflation?

As captured by Godly Otto and Wilfred I. Ukpere in a paper, Cost-push defines inflation arising from the supply side. It is often caused by the rising cost of production. This occurs when production costs increase and impact on the prices of the final products. The cost push inflation can also be called the “market power inflation” because the increase in the prices of goods and services originates from the supply side of the economy.

The reality is that, the inflationary push in Nigeria is fuelled by the high cost of factors of production or cost of inputs such as power supply, transport or raw materials. Multiple taxation and corruption are also major contributing issues.

As per timeliness, Alex Anameje considers the electioneering spending as a good reason for CBN to adopt contractionary monetary policy stance at this period as a way to keep the already high inflation from rising further.

A further analysis of the electioneering spending shows that domestic firms that are supposedly to benefit are usually cut out of the equation. Imomoh says Nigeria’s dependence on imported goods turn the pie against local manufacturers. “We import from second hand clothes, motor spear parts up to daily consumables.

Some of the material that are usually in high demand during campaign include paper used in printing posters, fabrics and polyethylene for branded wares, motor spare parts needed to service campaign vehicle. All these are in the list of major imported products into the countries.

As a matter of fact, since more of these items will be imported, there is a tendency for inflation to rise further considering cost of production in those countries. Rising cost of diesel and gas in Europe, US and China due to Russia Ukraine crisis is raising cost of production in those countries which will be passed down to us. This is what is referred to as “Imported Inflation”.

With the high cost of borrowing, local firms will be incapacitated to increase their production. This is the submission of Yussuff Dare Boonyamin of the Institute of Chattered Economist of Nigeria (ICEN). He says; “The policy is not business friendly especially for start-up as they will face high cost of borrowing”..

Another respondent said; “Giving these peculiarities in the Nigerian Economy, one would thought that CBN will reduce rate to enable SMEs access funds to increase their production capacity ahead of the seasonal demands since volume of money is expected to increase needed to strengthen  the purchasing power of consumers.”

CBN considered other factors as a reason to tighten rate. How weighty they are to support the option of tightening rate need further discussion.

CBN says; “Consequently, as regards the decision on whether to hold. tighten or loosen, MPC feels that loosening in the face of the rising policy rates in Advance economies may result in a sharp rise in capital outflow and faster dry-up of foreign credit lines. MPC also feels that loosening could lead to further liquidity surfeit and inflationary pressure. S to whether to hold, MPC feels its stance would strengthen the perception that the CBN has abandoned its primary mandate of taming inflation.

“On the need to tighten, MPC feels that tightening would help moderate the inflationary trade-off from the steady growth recovery so far. MPC also feels that tightening would help rein in inflation before it assumes a galloping trend, considering the progressive increase in headline inflation (m-o-m), particularly with the sharp 90 basis point increase in April, 2022.

“Furthermore, MPC feels that tightening would narrow the negative real interest rate margin, improve market sentiment and restore investor confidence. Equally, members believe tightening would moderate inflationary pressure pass-through to exchange rate depreciation and moderate the speed of capital flow reversal, provide incentives for foreign capital inflows and sustain remittances. Lastly, tightening could moderate government domestic borrowing, as government debt servicing to revenue ratio increased significantly in recent times, threatening debt sustainability.”

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