• Wednesday, May 22, 2024
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CBN hikes rate again in push to tame inflation

Nigerian banks’ low assets-to-GDP explains recapitalisation

The Central Bank of Nigeria (CBN) pushed ahead with its efforts to fight inflation on Tuesday by raising its monetary policy rate (MPR) for the second straight month by 200 basis points.

The combined 600-basis-point increase of its key interest rate since February 27 to 24.75 percent is enough to attract foreign investors into the country, analysts have said.

Last month, the apex bank increased the interest rate by 400 basis points to 22.75 percent.

Olayemi Cardoso, governor of the CBN, made the announcement of the further rate hike after the two-day Monetary Policy Committee (MPC) meeting in Abuja, attended by all the 12 members of the committee.

Increases merchant banks’ CRR to 14%

He said the committee also voted to change the asymmetric corridor from +100/-700 to +100/-300 around the MPR, retain the cash reserve ratio (CRR) of commercial banks at 45.00 percent, adjust the CRR of merchant banks from 10 percent to 14 percent and hold the liquidity ratio constant at 30.00 percent.

“These considerations underscored the importance of CBN’s mandate to bring inflation under control,” he said.

600bps increase enough to attract foreign investors – Analysts

Charlie Robertson, head of macro strategy at FIM Partners UK Ltd, said the CBN has now hiked rates as much as Egypt and both countries are showing how serious they are about getting inflation under control.

“Nigeria is now doing enough to attract foreign interest in its bonds, which should help lower borrowing costs for the government,” Robertson said.

Razia Khan, managing director and chief economist, Africa and Middle East Global Research at Standard Chartered Bank, said the tightening is likely to be welcomed by foreign portfolio investors, although the operational bottlenecks that have complicated investor participation in local currency security auctions must still be addressed.

She said: “These largely stem from the overall tight monetary policy that is in place, resulting in a NGN shortage in the domestic banking system. Given the importance of addressing this bottleneck, we expect that there will be near-term changes, allowing Nigeria to see the benefit from potentially larger portfolio inflows.

“Our view: this is of course entirely dependent on how FX behaves – but the outlook for inflows has now improved.”

Orji Udemezue, managing consultant/CEO of Flame Academy, raised concern over the increase in borrowing costs.

He said: “While we fight inflation, shall we destroy the economy? No nation can move forward… If you collect a deposit of N45 million in a bank today, you have to lock down N30 million to maintain CBN’s liquidity ratio. What then is left of the deposit? What CBN is saying is stop lending, otherwise, lending will come at a higher rate.

“The cost of borrowing is much higher, and it means that manufacturers and business owners should hold on to their businesses. And there’ll be no economic growth without entrepreneurship.”

He said the CBN is willing to give higher rewards to banks that deposit more money with them in its effort to mop up more money to rein in inflation.

Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, appreciates the commitment of the CBN to tackling inflation.

He said the limitations of monetary policy in this respect needs to be recognised, adding that there are contextual issues of weak transmission mechanism, weak financial inclusion, risk to financial intermediation and the escalating financing cost to the real economy.

“The economy needs as much attention to economic growth, job creation and production as it deserves for tackling inflation. This balancing act is critical for the economic recovery process,” Yusuf said.

Ore Odetunde, a research analyst at Anchoria Asset Management, said the decision by the MPC to further tighten its main policy rate shows confidence in the CBN’s ability to tame inflationary pressures and achieve its primary objective of price stability.

Odetunde said the extended hiatus in MPC meetings spanning six months suggests that this move may be interpreted as a necessary catch-up endeavor to align policy with prevailing economic realities.

“I also believe this is an ongoing step to fix the signaling effect of the MPR to market rates. Additionally, given the significant surge in money supply to N95 trillion observed in February, exacerbating inflationary pressures which have surged to 31.7 percent, there’s an imperative to maintain a hawkish stance and to continue to implement measures to absorb excess liquidity. This becomes all the more pressing in anticipation of the forthcoming minimum wage increase on the 1st of May.”

Tilewa Adebayo, CEO of CFG Advisory, said: “The key target in the economy is that we need to reduce inflation, and once you’ve set a target to 21 percent by year end, then you start issuing instruments that may be around 25 percent. In getting inflation under control, we have to compromise growth. I don’t expect growth to be more than 2-3 percent this year if we’re lucky, but it’s more important to bring down inflation.

“If you looked at the real hike, the calculation was at 700. But the practicality of hiking it that much at once isn’t there. Depending on the impact of this hike, there may be another hike in the next meeting.”

The Central Bank of Nigeria (CBN) has satisfied the taste of investors for attractive yield as it on Tuesday after the two-day Monetary Policy Committee (MPC) meeting raised its benchmark interest rate again by 200 basis points to 24.75 Percent.

Olayemi Cardoso, governor of the CBN, announced this in Abuja after the meeting. The MPC committee changed the asymmetric corridor from +100/-700 to +100/-300 around the MPR; retained the CRR of commercial banks at 45 percent, adjusted the CRR of merchant banks from 10 percent to 14percent and held the liquidity ratio constant at 30 percent.

Most analysts have anticipated an increase in the Monetary Policy Rate (MPR) to rein in inflationary pressure.

“Given the MPC’s strong position in addressing rising inflationary pressures, we expect the MPC to raise the MPR by 100bps to 150bps,” analysts at FBNQuest said.

“Our expectation is also supported by the need to maintain an attractive yield environment to sustain foreign investors’ interest in high-yielding fixed-income securities to facilitate the continuous appreciation of the naira,” the analysts said.