BANKS’ credit to the private sector decreased in March amid the policy rate hike by the Central Bank of Nigeria (CBN).

The decrease is expected to continue in the coming months as the CBN tightens its monetary policy rate (MPR) or benchmark interest rate, to control inflation.

After its monetary policy committee (MPC) meeting in February, CBN raised the benchmark rate by 400-basis-point to 22.75 per cent and by 200-basis-point to 24.75 per cent in March.

The increase directly affected interest rates banks use for lending to the private sector.

As interest rates increase, banks will try to limit their credit risk exposures to guard against higher non-performing loans.

Data from the CBN shows that loans to the private sector dropped to N71.21 trillion in March, from N80.86 trillion in February.

The drop could be linked to the effect of the CBN rate hikes to 24.75 per cent in March from 18.75 per cent in July 2024 to achieve price stability, some analysts pointed out.

The ICIR reported that CBN failed to hold its by-monthly MPC meetings in September and November 2023. It also failed to hold it in January 2024 and shifted it to February.

Analysis of the data by The ICIR shows that credit to the private sector consistently rose since CBN’s July 2023 meeting except in November 2023.

The data shows that banks’ loans to the private sector which stood at N56.46 trillion in July 2023, increased to N56.95 trillion in August, N59.51 trillion in September and N63.57 trillion in October.

While it dropped to N59.69 trillion in November, it increased to N62.54 trillion in December, N76.48 trillion in January 2024, and N80.86 trillion in February.

Analysts believe that the full impact of CBN’s policy rate hikes will continue to reflect on the country’s economy as borrowing costs trend higher while businesses seek alternative funding options in the local debt market.

The alternative funding could be through the issuance of commercial papers for the short term to keep their business operations afloat.

Analysts at Cowry Asset Management said, “While we think a continued slow growth in total credit to government and private sector will continue, businesses will explore further funding options amidst rising prices.

“On the other hand, we think the federal government will continue exploring various funding options with lower debt servicing requirements just to meet its project funding and investment obligations.”

Interest rates to remain high – Cardoso

In a Financial Times report on Monday, May 13, the CBN Governor, Olayemi Cardoso, dashed hope and said that interest rates would remain high until inflation is tamed.

The country’s headline inflation has throttled to 33.20 per cent in March this year and is expected to rise further when the figure for April is released by the National Bureau of Statistics.

Cardoso reiterated that the apex bank’s orthodox policies would continue to be implemented to tame inflation.

This indicates that the apex bank is likely to raise the benchmark rate when it meets next week Monday and Tuesday, May 20 and 21 for another MPC meeting.

There is “every indication” that MPC would “do whatever is necessary” to rein in inflation, Cardoso said.

“They will continue to do what has to be done to ensure that inflation comes down. Let’s face it: for a long period of time, the CBN did not embrace orthodox monetary policies.

“We want to go back to using an orthodox method, and it will take us to where we want to go,” he maintained.

He stressed that the apex bank had been ‘reoriented’ to focus on “price and monetary stability.”

Cardoso maintained that raising interest rates had been crucial, hoping that high interest rates would not linger for too long and act as a disincentive to investment and production.

“Hiking interest rates obviously has had a dampening effect on the foreign exchange market, so that has begun to moderate. It’s not a zero-sum game. You lose on one side, you get on the other,” the CBN governor said.

He added inflation was higher than he had hoped, blaming “distortions” mainly due to high food prices, and adding that it was not directly within CBN’s control.