As the heightened macroeconomic uncertainties, broad-based inflation and weakening global recovery associated with the ongoing Russian-Ukraine war and its reverberating consequences remain unabated, analysts are of the view that the Central Bank of Nigeria (CBN) will further push up interest rates.
The CBN had announced to hold its two-day Monetary Policy Committee (MPC) meeting today (Monday) and tomorrow (Tuesday), to take critical decisions on the country’s macroeconomic uncertainties.
In a chat with our correspondent over the weekend, Abu Noruwa, a lecturer at the Department of Finance, University of Lagos, shared the view that the MPC is tempted to increase the interest rates further to curb inflation.
According to Noruwa, this is because it will reduce the level and rate of loan borrowing, even though the economic growth will slow down amid managing employment levels and maintaining long-term interest rates.
Already, the World Bank has raised the apprehension that the world risks global recession in 2023 amid simultaneous interest rate hikes by central banks across the globe in response to rising inflation.
Commenting on this, the Unilag don said, Nigeria could avert the imminent downturn by “encouraging local production and consumption of goods and services, creating a conducive environment for individuals and businesses to strive through controlling inflation and maintaining long-term interest rates.”
“Increasing interest rates will make loans expensive for individuals and businesses,” he added.
On his part, David Adonri, stockbroker/chief executive officer (CEO), Highcap Securities Limited, lamented that, so far, the two policy rate hikes by CBN to tighten the money supply have not reversed the rising inflation rate.
“Perhaps CBN needs to consider mopping up excess liquidity from the economy using Open Market Policy tools. However, the sale of debt by CBN comes at a cost which can damage CBN’s balance sheet if excessive,” he said.
The Highcap Securities boss, while responding to the drop-down effect the looming global recession will have on nations’ economies, said Nigeria would be at the receiving end of global economic shocks. “The economy cannot withstand any global recession and so must brace up to manage the impact.”
He pointed out that the economic symptoms that manifest should a recession occur, would determine how to react to cushion the impact.
“However, protective measures to strengthen the economy include solving security challenges, budget consolidation, discontinuation of fuel subsidy and fast tracking completion of Dangote mega refinery,” Adonri added.
The apex bank had raised the interest rate, otherwise known as Monetary Policy Rate (MPR), by 250 basis points in response to rising inflationary pressure in its last two consecutive meetings as Nigeria’s inflation rate rose consistently since January this year.
Earlier in the month, InsideBusiness reported the CBN Governor, Godwin Emefiele, wants the interest rate increased to 14.5 per cent.
But arising from its bi-monthly meeting held on May 23 and 24, the committee members unanimously raised the interest rate by 150 basis points to 13 per cent after a careful review of domestic and global economic development as well as the benefits and downsides of each policy option, and in its July meeting held on the 18th and 19th voted to raise MPR by 100 basis points, thereby pushing interest rate higher from 13 per to 14 per cent.
The inflation rate which was at 15.60 per cent in January had surged to 20.52 per cent in August. It rose in February to 15.70 per cent; March, 15.92; April, 16.82; May, 17.71 per cent; June, 18.60 per cent; and July, 19.64.
The cumulative effect has led to an increase in the cost of food items, a drop in purchasing power and savings, a loss in the value of the naira, a rise in the cost of living, an increase in interest rate, and of course overall destabilisation of the macroeconomic structure.
For instance, the Nigerian Bureau of Statistics (NBS) recent report showed that the food inflation rate rose to 23.12 per cent on a year-on-year basis in August from 20.30 per cent rate in the corresponding month in 2021 caused by increases in the prices of bread and cereals, food products, potatoes, yam and other tubers, fish, meat, oil and fat.
Ikechi Agbugba, a senior lecturer at the Department of Agriculture and Applied Economics, Rivers State University, told InsideBusiness that the scary figures of inflation would impact almost every activity across food value chains.
“This can be seen in the rise in inflation and its impact on the agriculture sector will definitely transcend from the increase in the cost of production to the reduction in the purchasing power. Thus, further increasing food prices and drastically reducing the standard of living.
“This implies that the production possibility curve for food will bring about excess supply over demand,” he said.
Since food is an essential and major commodity, among other life priority needs, there is no alternative significance resulting from an increase in the percentage of family or household income spent on food, Agbugba stressed.
“Indeed, the high inflation rate will result in an increase in the interest rate which will affect farmers in accessing credit from banks as a result of high-interest rates. In order words, from principle, it can be said that it is time to increase the production capacity of food and any other agricultural resource, because any investment in agriculture will result in high returns regardless of the inaccessibility of funds from the banks to increase production may not necessarily lead to profitability since the funds will lead to high cost. This is a clear indication that the price of food items is what is driving the high inflation rate in Nigeria,” he added.