CBN adopts new strategy to reduce negative interest rates

The Central Bank of Nigeria (CBN), on Tuesday, said it will slow the pace of its rate hikes as a new strategy to reduce negative interest rates in a bid to boost investment in the country.

Negative interest rates occur when the inflation rate is higher than interest rate. Nigeria’s inflation rate rose to 21.91 percent in February, 3.91 basis points higher than the benchmark interest rate.

“In economics, where you find negative real rate, it is a disincentive to even investment,” said Godwin Emefiele, governor of the CBN.

He said this in Abuja after the two-day Monetary Policy Committee (MPC) meeting, which raised its benchmark interest rate, known as the Monetary Policy Rate (MPR), by 50 basis points to 18 percent from 17.5 percent in January this year.

BusinessDay analysis shows that the 50-basis-point hike is the slowest pace in almost 15 years (April 2008), with analysts saying this signals that the pace of rate hikes might stop before the end of the year,

At the end of the meeting, 10 members of the MPC voted to increase the MPR by 50 basis points, one member voted for 35 percent and one member voted to hold rate, Emefiele said.

He said: “The important thing for us to look at is what the margin between policy rate and inflation is. The margin between policy rate and inflation remain wide, which is negative real rate.

“So everything has to continue to put in place by the monetary policy authority to see that we reduce that margin or that gap in the negative real rate by ensuring that inflation comes down.”

Emefiele added: “Whatever needs to be done to rein in inflation, we will have to continue to do so and that will continue to be the strategy but we will do it more moderately going forward because we are conscious of the fact that when you overtighten, just like we have seen in the US and Switzerland, that it could begin to have contagion effect and negative impact on banking system and financial soundness and system stability in an economy.

“Those are the kinds of balance that we are looking at monetary policy to see that whereas we want to continue to tighten so as to rein in inflation, we must do it in such a moderate manner that we try to achieve moderation in inflation rate but at the same time without creating financial system instability in our economy.”

Analysts speak

Razia Khan, managing director/chief economist, Africa and Middle East global research at Standard Chartered Bank, sees little surprise in the CBN’s decision to raise its policy rate by 50bps to 18.0 percent (the market consensus).

In view of the CBN’s expectation that fuel subsidy reforms get underway “between now and the end of May”, inflation risks are seen to the upside still, she said.

She said that while the CBN is monitoring the cumulative impact of its tightening so far, it is keen to see the restoration of portfolio inflows into Nigeria. “To this end, it pledges more tightening, albeit at a more moderate pace, in order to reduce negative real interest rates.”

“In terms of reform, there are now firm expectations that we should see fuel subsidy reforms commencing imminently. Less clear is the timeframe for any FX policy adjustment. FX adjustment would likely have to precede any meaningful portfolio inflows, but current global volatility and its impact on the oil price could see fuel subsidy reforms being given prominence near-term, with FX reforms to follow, only later,” Khan said.

Read also: CBN raises interest rate to 18% on rising inflation, fragile growth

Yemi Kale, partner and chief economist at KPMG Nigeria, said the CBN maintained hawkish stance and raised MPR to 18 percent as predicted. “This will probably continue if inflation stays high and till it sees effect on GDP. CBN also cited impending subsidy removal. Interesting tactic by current administration before it leaves and definitely needed policy.”

Uche Uwaleke, professor of Capital Market at the Nasarawa State University Keffi, said it was apparent that the MPC was still concerned about rising inflation and the pressure in the forex market against the backdrop of its primary mandate of maintaining price stability.

He said: “I had expected MPC to maintain a hold position considering the significant drop in currency in circulation occasioned by the currency redesign policy and the fact inflation rate actually decelerated month on month between January and February 2023. The adverse impact of the recent cash scarcity on productive activities as well as the conclusion of election season should have provided justification for a hold position.

“That said, I think that the increase in the MPR by 50 basis points is a signal to financial markets that the CBN has begun the process of rate-hike pause and I expect that a complete halt in policy tightening will most likely happen at the next scheduled meeting of MPC in May. This is necessary in order to stimulate economic activities and create job opportunities.”

Temitope Omosuyi, investment strategy manager at Afrinvest Limited, said the pace of increase suggests that before the end of the year, the rate hike might stop. “Nonetheless the rates are still elevated, which means that it is negative for the government.”

He said: “And with what we have now, it is not going to be positive for the economy. It is neither going to influence inflation positively. It is not like we are reducing it even if the pace is reduced.

“Growth will still be negative because the cost of credits is still high. On inflation, the factors affecting it are really beyond increasing the interest rate because the kind of inflation we have which is cost push inflation. So I would not see the rate hike impacting inflation positively. And even though inflation is expected to decline, but only on the back of base effect and the naira scarcity.”

Ayodele Akinwunmi of FSDH Merchant Bank, said borrowing cost will likely increase for the borrowers, meaning lending rates might likely increase. “And in terms of fighting inflation, I have my doubts whether it would be able to fight it. Inflation at 21 percent is still a major monster. The government needs to do what they can to bring it down.”