Nigeria’s first interest rate hike in six years will increase the borrowing costs of businesses in the short-term and may fail to address surging inflation in isolation.
The Central Bank of Nigeria (CBN), on Tuesday, joined global central banks in raising benchmark interest rates to curtail rising inflation and stimulate foreign portfolio inflows (FPI).
The rate was raised by 150 basis points to 13 percent.
The implication of this is that the cost of borrowing by businesses, from manufacturers to small and medium-scale firms, will increase as banks reprice their assets and loans, according to analysts.
“What the recent rate hike means for the economy is that the cost of credit to the few beneficiaries of the bank credits will increase which will impact their operating costs, prices of their products and profit margins,” said Muda Yusuf, founder/CEO of Centre for the Promotion of Private Enterprise, an economic and business advocacy think tank.
“Investors in fixed income instruments may also benefit from the hike. However, there would be some adverse effects on the equities market,” Yusuf said.
The decision to hike rates, which was unanimously taken by members of the Monetary Policy Committee (MPC) after a two-day meeting in Abuja, was targeted at curtailing rising inflation and to support the output growth, Godwin Emefiele, governor of CBN, said.
The apex bank retained the asymmetric corridor around the MPR at +100 /-700 basis points, Cash Reserve Ratio at 27.4 percent, and Liquidity Ratio at 30 percent.
The rate hike, which caught some analysts by surprise, may not have the desired impact on inflation but will definitely increase the cost of capital of businesses, according to Taiwo Oyedele, head of tax and corporate advisory services at PwC.
“Given that inflation in Nigeria is largely driven from the supply side rather than excess money supply, the impact of the rate hike in pushing down inflation may be marginal while it could have more impact on growth,” Oyedele said.
“Cost of capital will rise, thereby putting more pressure on the margins of businesses and their ability to expand. This is also likely to increase the debt service cost of government,” he said.
Nigeria’s inflation rate jumped to 16.82 percent in April, the highest in eight months amid rising food and diesel prices.
On his part, Tope Fasua, CEO of Global Analytics, said the rate hike would slow down economic growth. He said manufacturers and producers would come for CBN’s neck because banks would hike borrowing rates, adding that the attempt was to slow down inflation but it may also be ineffective because of weak transmission mechanisms in Nigeria.
“In nearby Ghana, consistent hikes in their policy rates to about 19 percent have not slowed down inflation which is in the mid 20 percent. Sub-Saharan African economies must be managed with different thinking, else we continue to sink into despair. Taken together with what’s happening on the global scene perhaps, this is the onset of another global recession,” Fasua said.
Ayodeji Ebo, MD/chief business officer, Optimus by Afrinvest, said: “The rate hike is a surprise, especially with the magnitude and a major drift from the previous stance of the CBN.
“Raising MPR will not necessarily translate into increased FPIs due to the FX challenges. This will lead to high cost of borrowing for firms and the government. As a result, it would lead to higher cost of production and higher inflation rate,” he said.
Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited, said: “I think it is a necessary decision the MPC needs to make at this point, given happenings around the world and the rising inflation rate in Nigeria.”
He said although fragile, the economy seemed to be on a path of growth, given the Q1 2022 GDP figures released this week.
“However, the rising inflation rate needs some policy attention now so that it is not growth retarding,” he added.
Read also: For first time in six years, CBN hikes rate to 13%
According to Akinwunmi, the rising yields and interest rate hikes in other advanced economics may likely have negative impact on the Nigerian economy, both on the exchange rate and inflation rate if nothing is done now.
“Pressure on the exchange rate by maintaining a policy regime that is not in tune with reality, given the global economic environment, will cause problems for the economy,” he said.
The increase in the CBN’s benchmark interest rate will mean that banks will begin to reprice their assets and have broader investment opportunities according to analysts.
“The beneficiaries of interest rate hike globally tend to be the banks because the banks do better when interest rates are high,” Nnamdi Nwizu, co-managing partner/head of trading at Comercio Partners Limited, said.
According to him, it gives the banks high opportunity to raise their interest rates on loans, and also government securities most probably will start to move up, which naturally will give banks the opportunity to invest much higher level than they were now.
“For instance, the Treasury bill rate is trading at 5 percent and we expect that with this hike and possibly more hikes in the future, we will see those rates move up which naturally will give banks broader investment outlets,” Nwizu said.
Looking at it from the growth aspect, Bismarck Rewane, managing director of Financial Derivatives Company Limited, said: “You will see some manufacturers who have built capacity two to three years ago in the brewing and cement space take advantage of growth but my biggest fear is that there may be a need to look at the wages again.
“What can Nigeria do to adjust wage structure to make it competitive and not actually fuel inflation? This is a practical example of what is called a monetary policy trilemma and that is where we are,” he added.
