The tough economic situation may have put the Central Bank of Nigeria (CBN) in a delicate position as its Monetary Policy Committee (MPC) continues its meeting today to decide a better approach to handling nation’s economy.
The meeting is taking place at a time when the economic woes of Africa’s most populous nation hallmarked by zero earnings from her crude oil exports, foreign exchange liquidity crisis, unemployment and widespread hunger are worsened by galloping inflation that has eroded much of the value of the local currency (Naira) against increasingly appreciating dollar.
What options are open for the apex bank in trying to confront the grave situation of the economy with interest rate at 14 per cent, far below 20.52 per cent inflation rate? Will the MPC decided to increase rates or leave them unchanged? What are the implications of either decision?
Analysts say that in either case, the outcome will be of little help, especially because interest rate hikes had not proven effective in the past.
In addressing the situation, what tools are available for the CBN? Should the apex bank hike interest rate or use Open Market Operation (OMO) policies to confront galloping inflation?
Recently in developed economies of Europe and America, even some Asian countries, interest rates have been raised to confront ravaging inflation.
“One of the tools available to the Monetary Policy Committee (MPC) is interest rate management. There are other tools. But the easiest tool that is readily available to them is the use of interest rate hikes to rein in inflation.
“But unfortunately, hike in the interest rate in the past has not materially helped the economy in terms of reducing inflation,” says David Adonri.
According to the Managing Director, Highcap Securities Limited, increasing interest rates, otherwise called Monetary Policy Rate (MPR), had never been effective in the past in addressing inflation which he said has got to a tortuous level where it has to be confronted before it damages the economy irredeemably.
The Chairman, Association of Stockbroking Houses of Nigeria (ASHON), Sam Onwukwe, said for a country like Nigeria where the supply end of the economy is having challenges, a hike in interest rate is not a viable option. Unlike Nigeria, for other economies which have enough foreign exchange, hiking interest rates is a viable option to attract more inflows in the face of economic challenges.
According to the boss of Mega Equities Limited, a dealing member of the Nigerian Exchange, an interest rate hike is going to be counterproductive because it will end up creating more turbulence in the economy.
“Interest rate hike is not the solution to the country’s monetary policy problems. Investors are not playing in the market, and one of the reasons is that ours is not a free market. A hike in interest rate does not address this concern,” Onwukwe told our correspondent over the telephone.
He added “Foreign exchange crisis is a major concern also to investors. No investor takes a nose-dive into an economy where his proceeds are likely to get trapped.
“So, portfolio investors who constitute a significant percentage of foreign exchange inflows are staying on the sidelines. As long as the dollar inflows problem persists, the naira will be at the mercy of the dollar. And this will stoke further, the spike in inflation for an imports-dependent economy like Nigeria,” says the ASHON boss.
Also speaking, Tajudeen Olayinka said there are good reasons to expect a hike in interest rate as an outcome of the MPC meeting. However, from an analysis of previous scenarios, a hike in interest rate as a tool for reining in inflation had not been as effective as it should be.
Instead, what has effectively reined in inflation in the past is the open market operation policies whereby the CBN has used OMO policy to mop up excess liquidity in the economy. This, in itself, means that the CBN is selling instruments to mop up excess liquidity.
“But if the CBN sells instruments, it means it is creating liabilities that it must settle at a cost. That cost may be too heavy for CBN to settle in the future.
The apex bank, he said, has been in dire straits to settle for OMO policy options to fight inflation because the regulator lacks the needed money.
“So, the CBN is in a delicate situation where using interest rate hike as a tool to tighten money supply and fight inflation is as difficult as embarking on open market operation policy measures by selling debt instruments and securities to mop up excess liquidity,” Tajudeen stated.
“But among the two tools, one (OMO) has a high cost but the other (interest rate hike) has no cost; but it is not very effective,” the financial analyst concluded.
He explained that if CBN settles for interest rate hikes, commercial banks will immediately begin to reprice their loans to customers which will in turn spin off another jump in the inflation rate.
Rates hike is rather aggravating the situation. Whether the use of OMO policy or rates hikes, none of the approaches will work.
CBN knows that their approach in trying to rein in inflation is not working and is not going to work.
The reason is that you can not use demand-side management tools to stem inflation that is coming from supply-side factors. There is no way it can work.
“That is why we saw an aggressive rise in inflation after an interest rate hike between May and July. But it didn’t help. That is to tell you that what they are doing, rather than stem inflation, causes output drop”.
The question is why are they still hiking rates even when they know it is not working? They are increasing rates merely to respond to hikes in other economies, especially the developed economies which are hiking rates, US and UK which recently hiked rates. The more they hike rates, the more they attract investors to their economies. The remnants of investors who are still here will migrate to those economies because they have assurance and guarantee of returns.
So, the CBN does not want further capital flight out of Nigeria, especially the remnants of investors that are still here, to move out of the economy. So that is the essence of the rate hike.
“Therefore, I believe that there is going to be a rate hike by about 50 to 100 basis points, but as I said earlier, that cannot help the situation”, Olayinka inferred.
Comments are closed.