Inflation: Doubts raised over effectiveness of CBN’s rate hikes

Leading economists and analysts in the country have raised doubts about the effectiveness of the recent rate hikes by the Central Bank of Nigeria (CBN) to curb inflation.

Their reactions came a few days after the CBN raised the benchmark rate, the Monetary Policy Rate (MPR), twice in less than two months, cumulatively by 250 basis points from 11.5 percent in April to 14 percent in July.

Announcing the rate hike decision last Tuesday, the CBN identified the effect of the ongoing Ukraine-Russia conflict, upsurge in headline inflation, rising energy costs, the lingering impact of COVID-19 pandemic, shocks to foreign capital flows, and the likelihood that the growth of the Nigerian economy could be subdued as the factors considered before raising the MPR.

“The MPC noted with concern the continued aggressive movement in inflation, even after the rate hike at its last meeting, and expressed its unrelenting resolve to restore price stability while providing the necessary support to strengthen the fragile recovery,” Godwin Emefiele, CBN governor, said.

Nigeria’s headline inflation rose to 18.6 percent in June from 17.71 percent in May. The upsurge was attributed to supply-side shocks and high crude oil prices in the international market which have caused a huge spike in prices of petroleum products, especially diesel, within the Nigerian economy. It was also seen as a reaction to rate hikes by other central banks in the world.

However, economists and industry analysts are sceptical of the efficiency of the policy option the CBN has adopted, saying that its actions were externally induced, and do not necessarily address supply-side shocks, which are responsible for Nigeria’s rising inflation.

“In Nigeria, inflation is more of supply shocks. The CBN admitted it in one of its publications. Therefore, the hike in rate was not to curb inflation; rather, it was an attempt to make the Nigerian money market more competitive when compared with other economies where investors could move their money had the CBN not raised MPR,” Femi Saibu, a professor of economics and director, Institute of Nigeria-China Development Studies, University of Lagos, said.

“Unless we address the challenges in the agricultural value chain, such that food production could be moved without hindrances from the farm gate to markets, the increase in MPR will not have much effect in reducing inflation. However, the impact could be via the exchange rate but not through the interest rate,” he added.

He said to address the supply shocks, a regional agricultural productivity model should be implemented so that the food items consumed in each region are produced in that region.

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He said this would reduce the tendency of a supply shock in one geopolitical zone, causing serious disruption in other regions and that only industrial raw materials would be moved from farm gates to factories.

“The hike can only curb inflation if too much money is pursuing fewer goods. Then, the target will be to control money supply by increasing interest rates. However, the current inflation is not a demand push. I am afraid it may not achieve the desired results,” Evans Osabuoghien, a professor of Economics at Covenant University, said.

Analysts made the same submissions with their counterparts in academia. Phillip Anegbe, investment research and strategy analyst at CardinalStone, believes that the fixed income yields will trend upwards towards the end of the year.

“While admitting the supply-side nature of Nigeria’s inflationary pressures, the monetary authority justified its latest intervention on the need to keep demand-side triggers in check. The CBN’s action further reinforces our view that fixed income yields are poised to trend higher for the rest of the year,” Anegbe said.

“Raising interest rate is necessary but not sufficient to curb the rising inflation rate in the country. In addition, the pass-through effect of sharp naira depreciation in an import-dependent economy like ours makes it a less potent tool at this time,” Fatai Asimi, a Lagos-based economic research and market intelligence strategist, said.

According to him, the over 200 percent increase in diesel price means high cost of production for manufacturers, and a further rate hike will only increase production costs.

“Increase in interest rate is only effective on the demand side by altering consumption preference, and hence, savings decisions, between two periods. The current episode of inflation, cost-push, and rate hike will only aggravate issues, especially cost of doing business,” Kemi Akinde, an economist and CEO of Sophause Limited, said.

They suggested that addressing agricultural productivity constraints such as insecurity and logistical problems are alternative courses of action that could be pursued to reduce the surging inflationary pressures in the country.