Criticism trails CBN’s decision to hike MPR to 14%

*Central Bank of Nigeria, CBN.

*Central Bank of Nigeria, CBN.

29 July 2016, Abuja — The Central Bank of Nigeria(CBN), yesterday, jerked up its Monetary Policy Rate (MPR)to 14 per cent, attracting criticism from business experts who predicted that the hike will lead to increased corporate failures, unemployment and decline in the nation’s stock market.

At the end of its Monetary Policy Committee (MPC) meeting in Abuja yesterday, the CBN, raised the MPR from 12 percent to 14 percent, while retaining the Asymmetric Window at +200 and -500 basis points around the rate. The apex bank also retained the Cash Reserve Ratio (CRR) and the Liquidity Ratio at 22.50 per cent and 30.00 per cent, respectively.

Governor of the CBN, Mr. Godwin Emefiele, who announced the outcome of the MPC meeting, said that the move was towards ensuring price stability as it would attract more inflow of foreign exchange into the country. Justifying the new rate, he said, “Basically, the issues were that you notice during the May meeting, the MPC decide to say look, if we notice the balance between inflation and growth that we should stay with growth and expect that growth. But given the fact that monetary authorities cannot directly influence, we expect that working with fiscal authorities, we can achieve growth But at this meeting, we took a lot of time to deliberate on whether to favour growth as against inflation.

“We felt that there was a need in line with the CBN core mandate to look at price stability at a time- that if we favour price stability at this time and it signals an interest rate movement that will curtail inflation that when we curtail inflation, a lot more stakeholders interests would have been met, thereby encouraging in this case, the inflow of capital into the country.

“And as we have more inflow of foreign exchange into the country, what that does is that it deepens forex supply base and by deepening the forex supply base it makes forex available to end users , particularly for the manufacturing sector who need raw materials to boost manufacturing and industrial capacity and we are also hoping that when this is achieved, what you find is that naturally, prices would be affected downwards.

“When you have a situation when foreign exchange is also made available to those who want to import agriculture inputs, insecticides or plants it helps to boost agricultural productivity which will also help to moderate the effects on prices downwards. “What this does is that it generally creates activities that would boost not just manufacturing outputs but will indirectly push growth forward. That was purely the essence of let’s push to the direction of inflation and price stability which was the focus of this meeting against growth. “It didn’t mean that we didn’t have growth at the back of our minds. But we felt let’s start by looking at price stability, a push towards curtailing inflation, and at the same time ultimately see how we can achieve growth in the same vein.”

Hike will worsen economic situation
Analysts, however, faulted the decision of the MPC to hike the MPR saying it would worsen the economic situation in the country. “This is not an answer to the recession, the answer is to make more money available, but the CBN has decided to be tactical because growth is a long-term goal”, commented Mr. Bismarck Rewane, Managing Director/Chief Executive, Financial Derivatives Limited.

He stated that the MPR hike, “Is a formalisation of what is happening in the money market, where treasury bills rates are already higher than 14 percent hence it would not have an effect on interest rate in the market. But it will increase the cost of borrowing especially for small and medium enterprise (SMEs), increase default on debt, corporate failures and hence increase unemployment.

It will also increase the cost of borrowing for state governments. It will increase appetite for regulatory borrowing because banks would now prefer to buy treasury bills and bonds which now offers a higher rate. However, it will make the naira strengthen.

According to the Managing Director, APT Securities and Funds, Mr. Garba Kurfi, “The upward increase in interest rate by the CBN is not the best at the moment if the government is serious about encouraging local production. This is because a high-interest rate will make the cost of production higher if producers are to get loans at a higher rate from the financial institutions. The high-interest rate will discourage investments in the capital market if one can get 14 percent risk-free from the money market.

This move apparently is likely to promote money market but with the inflation rate at 16.5 percent may encourage”. Also commenting, Head, Investment Research, Cowry Asset Management Limited, Mr. Edgar Ebinum said, “The reason for the hike is obvious but it is challenging for the capital market, and it would stifle borrowing. While it is necessary to ensure a positive real return, by making the interest rate higher than inflation, but investors look beyond interest rate, the conditions in the economy is still not attractive to foreign investors The decision will cause the real sector to slow down, because there would be reduction in lending to the sector.

In fact, the hike makes lending more difficult for banks. The banks are already battling against rising non-performing loans and hence have reduced lending activities”. Speaking in the same vein, Managing Director, High Cap Securities Limited, Mr. David Adonri said, “The increase in MPR to nearly match inflation rate is expected response from the monetary authority. It will crowd out credit from the real sector and depress equities market.

The manufacturers would be affected since credit would be on the rise. The response of fiscal authority should be to reduce domestic borrowing and move towards fiscal consolidation”

On his part, Mr. Kunle Ezun, a research analyst with Econbank Plc noted, “The decision was expected and the expectation has been factored into transactions in the money market. Remember that TBs were been sold at 14 per ent last week.

That is why the market is calm. “I also believe that the 200 basis point rise is sufficient to address the rising inflation level now. The reality is that inflation level is more of consideration to foreign investors and they are not in the market now. The local guys don’t really bother about inflation.” The hike in MPR was however commended by Managing Director, Chief Economist,Africa, Standard Chartered Bank, Mrs Razia Khan.

She said, “The decision to raise the monetary policy rate despite growth concerns will give investors a clear signal to the authorities’ intent to sustain FX reforms. This should be well-received. “Given the cost-push nature of inflation in Nigeria, which largely stems from the shortage of FX, we believe that this was the right thing to have done. Today’s monetary policy decision demonstrates a commitment to FX liberalisation, which alone will undo some of the bottlenecks that have contributed to inflation.

“As Nigeria embarks upon the path of reform (FX liberalisation, fuel price deregulation, transparency initiatives, efforts to boost revenue mobilisation, power sector reforms), all with a view to easing the economy’s transition to lower oil prices, and creating the foundation for more sound long-term growth, we think that today’s MPC decision represented an important initial step in the right direction. Chief Executive Officer, SOFUNIX Investment and Communications Ltd and Chartered Stockbroker Mr. Sola Oni, said The Central Bank of Nigeria (CBN) has pushed up the Monetary Policy Rate (MPR) from 12 per cent to 14 per cent on the basis that the existing nominal anchor is a disincentive to investment for both foreign and indigenous investors, particularly, when compared to the current inflation rate. In portfolio management, the logical assumption is that relationship between interest rate and the stock market is inverse. This implies that when the interest rate is low, speculators move their funds from the money market instruments’ to the stock market to make a kill. As a corollary, the same speculators move from the stock market to other asset classes, especially, fixed income securities when the interest rate is high. By this logic, one can assume that the current increase in the MPR would boost investment in the fixed income securities while it may depress investors’ appetite for equity investment. But the fact remains that it is not always so as economists would say ceteris paribus which means all things being equall. There are many exogenous factors that affect investment decision at the level of investment objective. As for the economy, the stock market mirrors the economy. Therefore, it is not cast in iron to just conclude that the CBN’s increase of the MPC to a 10 -year high will have negative impact on the stock market.”

*Emma Ujah, Babajide Komolafe & Peter Egwuatu – Vanguard

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