Borrowing cost may worsen as MPC raises interest rate

The Monetary Policy Committee of the Central Bank of Nigeria, on Wednesday, unanimously voted to increase its monetary policy interest rates by 50 basis points to 18.5 per cent.

The CBN Governor, Godwin Emefiele, disclosed this while reading the communiqué of the third MPC meeting of the year on Wednesday.

Addressing journalists at the end of the two-day meeting in Abuja, Emefiele said the committee voted to keep the asymmetric corridor at +100 and -700 basis points around the MPR.

He also disclosed that the MPC voted to keep the Cash Reserve Ratio at 32.5 per cent while the Liquidity Ratio was retained at 30 per cent.

“Ten members voted to raise the MPR by 15 basis points and one member by 25 basis points, and all members voted to keep all parameters in constant,” Emefiele said.

The CRR is the share of a bank’s total customer deposit that must be kept with the central bank in the form of liquid cash, while the bank’s liquidity ratio is the proportion of deposits and other assets they must maintain to meet short-term obligations.

According to the CBN governor, the MPC saw the continued rise in inflation as still “the biggest challenge confronting macroeconomic stability in Nigeria”.

Justifying the rising inflation rate, the MPC blamed the high energy cost and challenges around the supply chain, among others, which are beyond the reach of the CBN.

However, he said policy rate hikes had prevented inflation from rising by about 8 percentage points over the past year.

“The MPC, therefore, opted to tighten, though moderately, to indicate (its) conviction that current policy stance is moderating the rising inflation,” Emefiele said.

The committee highlighted that the aggressive rate hikes were instrumental in curbing inflation, preventing it from reaching as high as 32 per cent in April, compared to the recorded 22.22 per cent.

He added, “The current trend in price development would continue to be monitored by the bank with greater collaboration with fiscal authority to address the drivers of inflation.”

When asked if the CBN will continue to raise the MPR as long as the inflation trend goes up further, Emefiele said, “I have said so. I am not going to give anybody any assurance that we are not going to do what we are doing, because we are seeing the result of what we are doing. We have also seen the impact of MPR hikes on the headline inflation.”

Analysts in the country had predicted the CBN and the MPC might raise the lending rates at the end of the Monetary Policy Committee.

The biting inflation rate, which is currently at 22.22 per cent as of April 2023, had assumed an upward swing in the past few months, and the situation has made the MPC keep raising the MPR.

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The apex bank had increased the MPR from 11.5 per cent earlier last year to 18 per cent in March this year across six consecutive rate hikes.

Within a period of one year, from May 2022 to May 2023, Nigeria’s interest rate rose by about 800 basis points.

It is expected that businesses operating in Nigeria will likely face a harder time as the cost of borrowing continues to rise.

Credit to the private sector has been slowing since the CBN started aggressive rate hikes in May 2022 to curtail rising inflation.

The CBN boss went ahead to state that the rate was having an expected impact on credit, adding that although the MPC was not excited that credit was dropping, it was necessary to reduce inflation.

“Around May 2022, credit was about N1.4tn, but as we speak today, credit is about N600bn. When you raise rate, you are trying to constrain credit.

“We are seeing it happen. And I must confess here that we are not happy that the hike in rate is constraining credit, but we have to do our work because inflation is at the heart of what we are saying we want to deal with.

“Because if you don’t raise rate to constrain credit, what that would mean is that it would create more inflationary pressure and create more problems for us,” Emefiele explained.

While Emefiele said he couldn’t promise that the CBN won’t raise the rate again if inflation continues its upward trend, the apex bank chief disclosed that the response of the financial regulator would not be aggressive.

The CBN’s interest rate at 18.5 per cent represents its highest level in 22 years.

Production dangerously low

The CBN governor further lamented the low oil production in the country, which he described as very dangerous for the economy.

He said, “We’re trying as much as possible to diversify or rely less on proceeds from crude and that’s how we brought in the RT200. They’re still important, but we’re not going to hide the fact that, unfortunately, that sector has not added much to the accretion to the foreign reserve in more than two years.

“We all know that sometime last year, oil production was less than a million barrels a day, and it is showing that even the newspapers published that production is still at 1.1 million barrels per day. That is a dangerously low level of production and export for Nigeria giving that what OPEC quota gives us is 1.8million barrels per day.

“If we’re having those kinds of shortfalls, we know that NNPC is facing its own challenges, but I think it’s time for all of us to fold our sleeves and get on board with the NNPC and say look what is causing this, we need to be able to ramp up production effectively to 1.8million barrels a day minimum plus condensate maybe to 2 or 2.3 million barrels per day.”

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