CEM ANALYSIS, ECONOMY | Experts have continued to react to the decision by the Monetary Policy Committee to increase interest rate as an effort to tame the roaring inflation in the country.
MPC, rising from their first meeting in 2024 under the new CBN Governor, Olayemi Cardoso raised Monetary Policy Rate also known as interest rate by 400 basis points from 18.75 per cent to 22.75 percent. This historic biggest raise has generated comments from economic analysts who consider other factors inducing inflation in the country.
Chief Analyst at Continental Economy Magazine, Alex Anameje while analyzing the hike in interest rate by CBN, calls the action as traditional policies that are effective only in a functioning economy. Among other factors, he pointed out one he considers as major which is lack of confidence in the system.
“These are traditional policies for moderating inflationary pressures. They are effective policies in a functioning economy. One of the major challenges we have in this economy right now is the dwindling confidence of most economic agents and that has continually made monetary policies ineffective.
“The cash outside the banking system is enormous because a typical Nigerian businessman does not want to be hurt again after the recent cash crunch even under the new CBN Governor. Efforts today should be geared towards re-building the shattered confidence of the operators in the economy”; Anameje said.
According to the last inflation report by the Nigerian Bureau of Statistics, the inflation that the economy currently experience is food prices induced. The report revealed that food inflation went up by 11.10% to hit 35.41% in January. It is obvious that unless food shortage is addressed, increment in interest rate will not curb inflation.
This is the position of Alex Anameje who expressed no confidence in any meaningful impact of the new rate to tame inflation. He advised the government to adopt a strategy to manage food supply to bring down prices of food.
“To tame inflation, the government should adopt supply management strategies to checkmate the rising prices of food considering that food takes over 60% of the consumer price index basket. Really, I cannot see the new policies making any significant impact on inflation rate considering the foregoing challenges”; Anameje said.
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He pointed out that “MPR of 22.75 is rather outlandish but when one considers the released inflation rate of 29.9%, one finds a gap of about 7%. In a normal economy, interest rates are supposed to be positive in real terms. This new MPR may only attract hot money from foreign portfolio investors who will pull out their funds at the slightest sensing of danger, thereby hurting our economy the more”.
Other financial analysts have also exercise cautiousness in their optimism towards the long-term impact of the interest rate hike. “While the immediate response on the parallel market is encouraging,” says Dr. Ayodeji Olushola, a Lagos-based economist, “it’s crucial to monitor the official market and the broader economy in the coming weeks. The success of this strategy hinges on effective implementation of the CBN’s announced reforms and addressing underlying economic issues.”
Others express concerns regarding potential side effects. “Higher interest rates can lead to increased borrowing costs for businesses and individuals, potentially dampening economic activity,” cautions Mr. Femi Akinsanmi, a financial analyst based in Abuja. “The CBN needs to carefully navigate this path to achieve its desired goals without hindering economic growth.”
Looking Ahead: Monitoring the Impact
The coming weeks and months will be crucial in assessing the effectiveness of the CBN’s strategy. The official market’s response, the impact on inflation, and the implementation of announced reforms will be key indicators of success. While the immediate appreciation of the Naira on the parallel market offers a glimmer of hope, a holistic approach addressing various economic factors remains essential for long-term economic stability.