CBN in H2 2024: Continue tightening or pause after July rate hike?

Deciding on economic policy is like balancing a tightrope—every move counts. As the Central Bank of Nigeria (CBN) faces a pivotal choice for the second half of 2024, the big question is: should they keep tightening the ropes with more rate hikes or pause to see how the recent moves affect the economy?

The Central Bank of Nigeria (CBN) has been vigorously tackling inflation with its primary weapon: the Monetary Policy Rate (MPR). The most recent strike came in July, when the CBN boosted the MPR by 50 basis points to 26.75 percent, within an asymmetric corridor of +500/-100 basis points. This increase is part of an aggressive strategy, marking a total adjustment of 800 basis points in 2024 alone.

“The rising costs of transporting farm produce, coupled with security challenges in food-producing areas, have exacerbated the situation.”

Inflation in Nigeria has been on a steep upward trend, reaching 34.19 percent in June 2024, the highest since March 1996. This surge has been driven predominantly by food inflation, which soared to 40.87 percent. The rising costs of transporting farm produce, coupled with security challenges in food-producing areas, have exacerbated the situation.

According to the National Bureau of Statistics (NBS), core inflation (which excludes volatile items such as food and energy) also saw a significant rise, hitting 29.5 percent in June 2024. This increase is attributed to higher import costs and the pass-through effect of exchange rate depreciation.

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The case for pausing the tightening policy
At this juncture, it is imperative for the apex bank to recognise the potential risks associated with any further aggressive tightening policy. As the BusinessDay analysis has highlighted, higher interest rates can dampen investment and credit expansion, potentially stifling economic growth.

Moreover, the increased cost of borrowing may lead to a reduction in consumer spending, further slowing down economic activity.

Risk of continued tightening

The frequent rate hikes have had a significant impact on borrowing costs for Fast-Moving Consumer Goods (FMCG) companies. Higher interest rates have led to increased debt servicing costs, compelling these firms to reassess their debt structures and overall financial strategies.

According to a BusinessDay analysis, the FMCG sector in Nigeria has witnessed a dramatic shift in borrowing trends. Major players—including Nestlé, Unilever, Cadbury, BUA Foods, Nascon Allied Industries, and Dangote Sugar—borrowed a staggering N411.994 billion in Q1 2023.

Fast forward to Q1 2024, and this figure has more than doubled to N1,108.277 billion, marking an eye-watering 169 percent increase. This surge in borrowing reflects the sector’s efforts to navigate economic challenges and seize growth opportunities.

This dramatic rise in debt brings with it significant borrowing costs. In Q1 2023, these FMCG giants faced a cumulative borrowing cost of N8.788 billion. By Q1 2024, this cost has surged to N37.674 billion, representing an astonishing increase of 328.7 percent.

The economic implication is that the sharp increase in borrowing costs can strain FMCG companies’ financial health. Higher borrowing costs may squeeze profit margins, as firms must allocate more revenue to service their debt.

Read also: Monetary policy jumps 50 basis points: CBN’s bold move amid stubborn inflation

This financial pressure could limit their ability to invest in new projects, innovate, or expand. Companies may also face challenges in managing cash flow, potentially leading to cutbacks in other areas such as marketing or research and development.

The ripple effects extend to households as well. As FMCG companies pass on increased costs to consumers, everyday products may become more expensive, as is happening now.

Additionally, some goods experience shrinkflation—a phenomenon where the package size remains the same but the actual content decreases. This can subtly impact consumers’ purchasing power and household budgets. The rise in the cost of living, driven by the 40.87 percent food inflation rate, further exacerbates these challenges for households.
The healthcare sector is also feeling the pinch from high borrowing costs, much like the FMCG sector.

Analysis of key players such as Fidson, May & Baker, and Neimeth International reveals a significant uptick in their debt levels.

In Q1 2023, these companies collectively owned N19.89 billion. By Q1 2024, this amount surged to N27.78 billion, marking a notable 39.7 percent increase.

The borrowing costs associated with this rising debt have also climbed. In Q1 2023, the cumulative borrowing cost for these healthcare firms was N1.121 billion. By Q1 2024, this cost had edged up slightly to N1.139 billion.

These trends highlight the financial challenges faced by healthcare companies and the importance of managing debt effectively. The implications extend beyond balance sheets—they directly affect vulnerable populations.

As healthcare providers grapple with higher costs, there’s a risk of reduced access to quality healthcare services. Vulnerable individuals, including low-income patients and marginalised communities, bear the brunt of these financial pressures.

Read also: Banks increase loan rates after CBN’s fourth straight hike

Benefits of a pause

Conversely, pausing the rate hikes could provide the economy with much-needed breathing space. It would allow businesses to adjust to the new interest rate environment and stabilise their operations.

This could lead to a more balanced growth trajectory, fostering economic recovery and stability.

Usman, an economist working at a research institute, believes it is time for the CBN to pause its tightening policy. “The aggressive rate hikes have been necessary to combat inflation, but continuing on this path could do more harm than good,” he says.

Usman further suggests that both fiscal and physical policies should be employed. “While fiscal policy uses necessary instruments to address the problem, the physical aspect should wage war against any form of insecurity,” he advises.

He emphasises that the government knows where the problem is coming from—it is insecurity. “Inflation will remain unabated because the supply chain of food is disrupted locally. Effectively fighting insecurity will surely impact inflation, which is driven mostly by food prices,” he concludes.

Future Outlook

As Nigeria enters the latter half of 2024, the CBN’s decisions will be closely watched. The central bank must weigh the immediate need to control inflation against the longer-term goal of fostering sustainable economic growth. Analysts suggest that a cautious approach, potentially involving a pause in rate hikes, could help strike this balance.

The CBN’s policy choices in the coming months will be pivotal in shaping Nigeria’s economic landscape. The decision to either continue tightening or pause after the recent July rate hike will depend on a careful assessment of the prevailing economic conditions and the impacts of past measures. As the nation navigates these uncertain waters, the central bank’s actions will be crucial in steering the economy towards a stable and prosperous future.

Oluwatobi Ojabello, senior economic analyst at BusinessDay, holds a BSc and an MSc in Economics as well as a PhD (in view) in Economics (Covenant, Ota).

Wasiu Alli is a business and finance journalist at BusinessDay who writes about the economy, business trends, and politics. He holds a BA. Ed. and M. Ed. in English Language and Education.