COST of funds for businesses is set to go higher as the Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN) today once again jacked up the monetary policy rate (MPR) to 18 per cent.
The CBN’s MPR sets the tone for lending rate by commercial banks to their customers. Banks’ interest rate on borrowings by its customers, most of them businesses, always consequently flows in tandem with the MPR movement.
A multiplier effect is the inflationary rate, which tends to also move up as businesses pass on the increased cost of production and services to the end-chain, the consumers.
At the last MPC meeting in January, the committee had raised the rate to 17.5 per cent.
The CBN Governor, Godwin Emefiele, who spoke after the end of the meeting, cited concerns of upward risks and price adjustments in a build-up to petroleum subsidy removal, rising prices of other energy sources, continued exchange rate pressure and uncertain economic climate as conditions that informed the upward adjustment of the policy rate.
Emefiele, explaining how the MPC members arrived at the new rate, said 10 members voted to raise the MPR to 50 basis point, one member voted to leave the MPR at 25 basis point, while one member voted to retain the old rate.
He noted that all members voted for other parameters to remain constant.
Summarily, the MPC voted to raise the MPR to 18 per cent, leave the assymetrical corridor at +100/-700, hold the cash reserve ratio at 32.5 per cent, and also hold liquidity ratio at 30 per cent.
The CBN governor observed that the committee deliberated on the naira redesign policy, frequent down-time in transfers in banking channels, and glitches in online payments, noting that these areas were being addressed to lessen the economic burden on the people.
He observed, however, that the naira redesign policy had led to an inroad into the apex bank’s cashless policy programme.
Increase in the monetary rate is always bad news for the average Nigerian; this time, the inflation rate currently at 21.91 per cent is expected to head north as prices of goods and services react to the new monetary rate.
The chief economist, Coronation Merchant Bank, Chinwe Egwim, who spoke on the impact of the development on the economy, feared it would, indeed, increase borrowing costs.
“The MPR is a tool to tackle inflation. The concerns raised by the CBN governor on legacy infrastructure gap affecting food price is expected. This is part of the reason why the interest rate is high to manage inflation and cost of borrowing,” Egwim said.
She noted that high energy prices should be expected, advising that small scale businesses would have to sustain cost management posture to enable them be in business.
The economist said, “SMEs should adopt innovative changes at this time and expand their investment portfolio to enable them generate additional income.”
On the global scale, she noted that the international capital market would remain expensive for Nigeria considering its high appetite for borrowing, and considering the rate hikes by European central banks and other global lenders.
She also stressed the importance of the monetary and fiscal policy aligning together.
A development economist, Kelvin Emmanuel, told The ICIR that the hike in rate would have consequences on the real sector part of the economy.
Emmanuel said, “The decision to hike MPR by 50 basis points in a continuous attempt to align the inflation to interest yield curve and maintain a band of 400 basis points, while it might seem to be a good way to prevent a negative real return on yield for institutional capital, has a counter-productive impact on the cost of capital to the real sector.
“And this is because producers pass on to end consumers the higher cost of capital for production. In attempting to solve one problem of negative return on yield, the MPC is creating another problem of a hike in demand pull inflationary buffers for the consumer price index.”
