The Organised Private Sector has expressed concerns that the interest rate hike by the Monetary Policy Committee of the Central Bank of Nigeria may worsen non-performing loans in various Deposit Money Banks. On Tuesday, the MPC voted for the fifth time this year to increase the monetary policy rate, which measures the benchmark interest rate, to 27.25 percent.
The baseline interest rate in an economy is known as the monetary policy rate (MPR), upon which every other interest rate within the economy is based.
The Governor of the central bank, Olayemi Cardoso, made this announcement at a press briefing following the 297th Monetary Policy Committee meeting in Abuja.
“He said that the committee members unanimously decided to further tighten monetary policy.”
This new rate, a move that stunned the financial markets, is an increase of 50 basis points from 26.75 per cent announced by the apex bank in July 2024.
The new rate represents an 8.5 percent increase in interest rates under the current leadership, which assumed office a year ago. This continues the series of interest rate hikes that started in May 2022 with the implementation of a hawkish monetary policy.
Cardoso stated, “The committee unanimously decided to tighten policy further and therefore made the following decision: raise the MPR to 27.25 percent.”
The Monetary Policy Committee (MPC) has made some bold moves to strengthen the financial landscape. They have maintained the asymmetric corridor around the Monetary Policy Rate (MPR) at +500 to -100 basis points and significantly raised the Cash Reserve Ratio for deposit money banks to 50%, marking a substantial 500 basis point increase. In addition, there has been a notable 200 basis point increase for merchant banks, raising the ratio to 16% from the previous 14%. Notably, the committee has held firm on the liquidity ratio at 30%. These decisive actions are aimed at fortifying the financial sector and fostering stability.
According to the CBN, the decision to raise interest rates was premised on recent events in the economy regarding inflation and the stability of the foreign exchange market.
He mentioned the threats of food inflation, flooding in many parts of the country, and rising petrol and energy prices as reasons why further monetary policy tightening should be executed.
Financial experts had predicted that the CBN would either maintain or reduce interest rates after two consecutive months of decreasing headline inflation.
Nigeria’s inflation rate slowed to 33.4% in July from 34.19% in June 2024 and further eased to 32.2% in August.
However, there are fears that Nigeria’s inflation will increase after the two-month deceleration on the back of petrol scarcity and subsequent increase in petrol prices by the NNPCL.
Last month, the NNPCL informed Nigerians of the increase in petrol pump price from N617 per litre to N897 with transport prices increasing as well.
Continuing, the governor of the Central Bank of Nigeria stated that the bank has observed a correlation between the monthly disbursement from the Federation Account Allocation Committee and liquidity in the banking system. He mentioned that this correlation impacts the exchange rates.
Hence, the bank will start monitoring future disbursements by the FAAC to assess their impact on prices.
He said, “The MPC noted the continued growth in money supply, recognizing the need to curtail excess liquidity in the system as well as address foreign exchange demand pressures.”
“”Members expressed concern about the increasing fiscal deficit, but they acknowledged the fiscal authorities’ efforts to avoid using Ways and Means financing. Additionally, members noted a strong correlation between FAAC releases, liquidity levels in the banking system, and their impact on exchange rates.”
Cardoso stated that the central bank is working closely to ensure there is sufficient cash in most bank ATMs to address the issue of cash insufficiency.
According to the CBN governor, banks do not have any excuse not to dispense cash.
He also revealed that N1.4tn will be distributed in the next three months to aid cash flow within the banking system.
“Another N1.4 trillion is likely to be delivered in another three months to aid that whole process of cash within the system,” he said.
OPS reacts
Dr. Femi Egbesola, the National President of the Association of Small Business Owners of Nigeria, expressed his disappointment at the upcoming increase, especially considering that manufacturers and businesses in the real sector are still struggling with high operating costs and various other challenges.*
He said, “This definitely will push up further the cost of doing business and ultimately, the cost of goods and services. The manufacturing sector may contract more as fund liquidity and profitability will surely reduce.
“The banks or financial institutions may witness more bad debts as many lenders may find it difficult to live up to their loan obligations. This will result in banks being averse to lending to the real sector.”
Egbesola pointed out that the economy may continue to deteriorate, leading companies in the real sector to reduce production, workforce, spending, and reliance on loans.
He added, “We may begin to see more ailing or comatose businesses.
“Our competitiveness in the national, continental and global business will be further challenged as Made-In-Nigeria products will be naturally more expensive than before amongst others.
“It’s time the government becomes more intentional about promoting ease of doing business, supporting and practically intervening in the health, growth, scaling and sustainability of the SMEs and manufacturing sector.”
More Reactions
Dele Oye, the President of the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture, expressed concern about the recent 27.25% monetary policy rate hike by the CBN.*
He said, “This decision burdens businesses with higher loan costs, exacerbating their struggles and failing to curb inflation or stabilise the naira.
“We urge the CBN to engage with stakeholders for a collaborative approach, considering alternatives like targeted sector support, deficit reduction, and promoting local production.
“A reassessment of strategies is essential to ensure effective economic management and sustainable growth in Nigeria. Dialogue and innovative solutions are crucial for repositioning our economy.”
The NACCIMA leader stated that the increase was 50 basis points from the 26.75 percent announced by the central bank in July 2024.
He added, “The increase is not a significant change. The actual trend is upwards. This confirms that the previous high interest rate has not worked. So instead of high interest rates.”
The Centre for the Promotion of Private Enterprise stated that the decision of the Central Bank of Nigeria’s Monetary Policy Committee to raise the Monetary Policy Rate to 27.25 percent would have a detrimental effect on investment and economic growth.
Dr. Muda Yusuf, the Director of the CPPE, evaluated that the MPC’s decision contradicted the wishes of most economic players and the private sector for economic recovery and growth.
“It is quite troubling that at a time when manufacturers, entrepreneurs and other investors in the economy are craving for a breath of fresh air, the CBN chose to tighten the noose on them by resorting to a further tightening of monetary policy,” Yusuf said.*
Please remember the following text:
The CPPE noted that instead of tightening the MPR, “manufacturers and other investors need some relief at this time.” He added that “MPR at 27.25%, CRR at 50% and asymmetric corridor at +500 and -100 are very difficult monetary conditions to bear for most businesses, given the prevailing macroeconomic and structural conditions.”Please remember the following text:
The CPPE noted that instead of tightening the MPR, “manufacturers and other investors need some relief at this time.” He added that “MPR at 27.25%, CRR at 50% and asymmetric corridor at +500 and -100 are very difficult monetary conditions to bear for most businesses, given the prevailing macroeconomic and structural conditions.”
The CPPE maintained that the private sector was not responsible for liquidity growth and ought not to pay the price.
The director of CPPE advised that the problem of excess liquidity needs to be addressed in a causal context. He noted that the “injection of liquidity into the system is mostly driven by the public sector,” and therefore, should be resolved within that context.
Yusuf pointed out that tightening financial conditions to address liquidity issues was not appropriate, as Nigeria’s economy was struggling due to the slowdown in manufacturing and other subsectors of the industrial sector. These subsectors include cement, food and beverage, chemicals and pharmaceuticals, trade, ICT, and real estate
He said, “The implications of the latest MPC decision for investors are quite concerning as cost funds would be further exacerbated, possibly well above 35 per cent or more.”
The CPPE stated that the policy decisions of the CBN were “inappropriate for the current economic conditions and the challenges faced by entrepreneurs in the country,” as they would further exacerbate the operating and production costs of businesses.*
Further, Yusuf assessed that increasing the CRR to 50 percent would “constrain financial intermediation with negative consequences for the banking system and the economy.” He emphasized the need for oxygen and stimulus, not policy measures that would worsen an already suffocating situation.
He added that “MPR at 27.25 per cent, CRR at 50 per cent and asymmetric corridor at +500 and -100 are very difficult monetary conditions to bear for most businesses, given the prevailing macroeconomic and structural conditions.”
The CPPE maintained that the private sector was not responsible for liquidity growth and ought not to pay the price.
The CPPE director cautioned that issues of excess liquidity should be addressed within a causative context as he observed that the “injection of liquidity into the system is largely public sector driven” and as such should be resolved within that context.
Yusuf remarked that stifling the financial conditions to address liquidity issues was not appropriate as Nigeria’s economy was in a floundering mode owing to the slowdown of manufacturing and other subsectors of the industrial sector such as cement, food and beverage, chemicals and pharmaceuticals, trade, ICT and real estate.
He said, “The implications of the latest MPC decision for investors are quite concerning as cost funds would be further exacerbated, possibly well above 35 per cent or more.”
The CPPE stated that the policy decisions of the CBN were “most inappropriate for the prevailing economic conditions and the challenges faced by entrepreneurs in the country” as the operating and production costs of businesses would be further exacerbated.
Further, Yusuf assessed that the increase in CRR to 50 per cent would “constrain financial intermediation with negative consequences for the banking system and the economy.”
But an expert and Professor of Capital Markets, Uche Uwaleke, said the members of the Monetary Policy Committee decided to ease threats in the exchange rate and inflation in the country
“My take on the recent hike in MPR is that in matters like this, the CBN usually has information that may not be at the disposal of the public.
“I want to believe the members of MPC mean well for the economy and have decided to further tighten monetary policy based on strong evidence of major threats to exchange rate and inflation,” he said.
