Uche Uwaleke: CBN Increasing MPR To 22.75% Is Overkill, Can Distort Economy

Imo State’s former Commissioner for Finance, Professor Uche Uwaleke, has said that the decision of the Monetary Policy Committee (MPC) to hike the Monetary Policy Rate (MPR) by 400 basis points to 22.75% is ‘overkill’ and has the potential to distort the economy.

The MPC, on Tuesday, conducted its first meeting in 2024 on Tuesday, also marking the first meeting chaired by the Central Bank governor, Olayemi Cardoso, since he assumed office in 2023.

As a result of the meeting, the CBN raised the benchmark interest rate by 400 basis points to 22.75 percent from 18.75 percent.

Uwaleke then, while discussing the matter in an interview with ARISE NEWS on Wednesday, said, “I take the view that it was an overkill.”

The professor explained, “The situation in which the MPR was jacked up by as much as 400 basis points in one fell swoop, and the members didn’t just stop there, they also went ahead to increase the Cash Reserve Requirement from 32.5% to 45%, further widened the asymmetric corridor, I think, as I submitted earlier, that it was simply an overkill.

“You can liken it to a situation in which a patient that is being treated and is expected, for an ailment, to take three pills a day, one in the morning, one in the afternoon, one in the night, and then, the patient decides to take all at once to cure the ailment. That kind of approach may even end up hurting the patient.

“So, that’s the kind of situation that we find ourselves, and I think, given the fact that the MPC is also expected to meet next month, they have another scheduled meeting next month. So, why the sledgehammer, so to say, that has the potential to distort other things in the economy?”

Uwaleke further mentioned that the jacking up of the MPR will slow down the growth of the country’s GDP as he said, “What has happened now has implications for growth. MPC didn’t meet in September last year, they also didn’t meet in December last year, and then what did we find? I don’t have empirical evidence to support it, but anecdotal evidence will suggest that part of why GDP grew from 2.54% in Q3 of 2023 to 3.46% in Q4 could be possibly because MPC didn’t meet to jack up rates, because if that had happened at the time, GDP would have come in lower. So, there is no doubt that there is a trade-off between the two, and what needs to be done is to always seek to achieve a balance.”

The professor then mentioned that monetary policy is not meant to work in isolation, saying that both monetary policy and fiscal policy “are expected to work together to achieve economic goals of low and stable inflation of sustained GDP growth, low unemployment and so on.” However, the 400 basis point increase in the MPR was going to negatively affect fiscal policy.

He said, “Against the backdrop of elevated inflation at 29.9%, the expectation was that the CBN will further tighten monetary policy.”

He then went on to say, “Against the backdrop of the fact that even the government is trying to put in place measures to reflect growth, to reflect the economy to stimulate growth, and also to ensure access to credit. Recently, the government is talking about introducing conditional credit scheme, introducing student loans scheme on the one hand. Then on the other hand, you have monetary policy also trying to jack up interest rates. So, for me, that’s working across purposes. The two must be seen to be working together.”

Giving his opinion on what the MPC could have done, he said, “My position is that, yes, the MPC ought to have tightened and possibly increased the MPR by not more than 20 basis points, and watched how that permeates through the economy. By the time they meet in March, they can also take another position. But jacking it up by 400 basis points and also increasing the CRR, that is where I see an overdose.”

Ozioma Samuel-Ugwuezi