CBN
Financial experts canvass fiscal, structural measures to effectively combat inflation
Story highlight
- Financial experts argue that the CBN’s reliance on the Monetary Policy Rate (MPR) to control inflation is ineffective due to non-monetary factors like high energy costs and regional insecurity.
- The recent 150 basis point MPR hike to 26.25% is expected to negatively impact the equities market and production costs.
- Experts call for a multi-faceted approach, including fiscal and structural measures, to effectively address inflation.
Some financial experts say the heavy reliance on the Monetary Policy Rate (MPR) to control inflation appears to be ineffective, considering the significant non-monetary factors contributing to inflation in Nigeria.
The experts stated this in an exclusive chat with Nairametrics, while reacting to the Central Bank of Nigeria (CBN)’s increase in interest rate by 150 basis points to 26.25%.
According to the experts, these factors include high energy and transportation costs, as well as insecurity in the country’s food-producing regions.
Experts’ view
The President of the Association of Capital Market Academics of Nigeria (ACMAN), Professor Uche Uwaleke, in an exclusive interview with Nairametrics, said that the heavy reliance on the MPR to control inflation seems ineffective, given the significant non-monetary factors driving inflation in Nigeria such as high energy and transportation costs, as well as insecurity in the country’s food-producing regions.
Uwaleke noted that the recent 150 basis point increase in the Monetary Policy Rate (MPR) is expected to negatively impact the equities market.
According to him, there is an inverse relationship between interest rates and equity market returns, and this rate hike could lead to portfolio rebalancing in favour of fixed-income securities.
“If I had been a member of the Monetary Policy Committee (MPC), I would have voted to maintain the current rate,” he stated. “The aggressive policy rate hikes are adversely affecting output, as the high cost of funds stifles production.
“Furthermore, the heavy reliance on the MPR to control inflation seems ineffective, given the significant non-monetary factors driving inflation in Nigeria, such as high energy and transportation costs, as well as insecurity in the country’s food-producing regions.”
The ACMAN President expressed concerns that the current monetary policy may not adequately address the root causes of inflation in Nigeria, while simultaneously imposing burdens on economic production and growth.
Managing Director of Highcap Securities Limited, Mr. David Adonri, expressed surprise at the recent decision to further hike the interest rate, noting that he had expected the Monetary Policy Committee (MPC) to refrain from such action given the recent moderation in the inflation rate.
He remarked, “At this rate, the increase may negatively impact production while simultaneously escalating the cost of imports.”
Adonri noted the growing concerns within the financial community about the potential adverse effects of continued interest rate hikes on the broader economy, including industrial output and import expenses.
The Managing Director of Arthur Steven Asset Management Limited and former President of the Chartered Institute of Stockbrokers (CIS), Mr. Olatunde Amolegbe, on his part, noted that the recent interest rate hike was anticipated due to the ongoing rise in inflation and instability in the foreign exchange market.
“The move can be considered moderate, given the aggressive tightening we’ve seen from the MPC in recent months,” Amolegbe stated. “It appears that the Committee believes the impact of exchange rate volatility on inflation is more significant than that of interest rates, hence the decision to continue tightening by raising policy rates. However, it is clear that monetary policy actions alone will not stem the rise in inflation.”
He added, “My hope is that expected actions from the fiscal and structural sides will be implemented quickly to complement the efforts of the CBN.”
Analyst and Head of Research at FSL Securities Limited, Mr. Victor Chiazor, said that inflation remains largely driven by food inflation which has risen above 40%, noting that further tightening may even worsen food inflation, especially for food producers exposed to debt financing.
He noted that the government must shift focus towards addressing fiscal issues triggering inflationary pressures such as high energy prices, insecurity, bad infrastructure, and high exchange rate amongst other issues as that is the only time we may see a steady reversal of this upward trajectory.
What you should know
The Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) has raised the benchmark interest rate by 150 basis points, increasing it from 24.75% to 26.25%.
CBN Governor Yemi Cardoso announced this at the press briefing following the bank’s 295th MPC meeting and added that the bank retained the Cash Reserve Ratio (CRR) for Deposit Money Banks (DMBs) at 45% and maintained the asymmetric corridor around the MPR at +100 and -300 basis points. The liquidity ratio of banks was also set at 30%.
Governor Cardoso attributed the third consecutive interest rate hike in 2024 to the continued efforts to moderate inflation, which reached 33.69% in April 2024, according to the National Bureau of Statistics (NBS).
He noted that members of the MPC observed a significant decline in other inflation metrics, such as food and core inflation, suggesting the positive effects of the apex bank’s hawkish monetary policy stance since the beginning of the year.
