Interest Rate Tightening to Temper Growth – Analysts
Growth expectations for 2024 could be dented by sustained benchmark interest rate hikes by the monetary authority, analysts told MarketForces Africa, saying the private sector will feel the negative impacts of a 50 basis points increase in the policy rate.
A higher interest rate environment is negative for private sector growth; analysts emphasize that the mounting pressure on the productive economy could lead to job losses and constrained capacity.
At the end of a two-day meeting of the monetary policy committee, the Central Bank of Nigeria (CBN) announced that the key lending rate has been adjusted to 26.75% from 26.25% in a bid to anchor the worsening inflation rate.
The private sector is facing multifaceted macroeconomic crosswinds that have forced output prices to rise for several months as inflation hits production costs. Naira instability has triggered near corporate distress, while aggregate consumer spending has declined due to an adjustment in consumption patterns.
The banks’ lending rates to customers have raised the costs of funds for producers, increasing the risk of default for local lenders as well. In taking the decision to hike the rate, the Committee said it was mindful of the effect of rising prices on households and businesses and expressed its resolve to take the necessary measures to bring inflation under control.
MPC re-emphasized its commitment to the Bank’s price stability mandate and remained optimistic that, despite the June 2024 uptick in headline inflation, prices are expected to moderate in the near term.
This is hinged on monetary policy gaining further traction, in addition to recent measures by the fiscal authority to address food inflation. In its policy consideration, the Committee noted the persistence of food inflation, which continues to undermine price stability, the CBN said.
The committee observed that while monetary policy has been moderating aggregate demand, rising food and energy costs continue to exert upward pressure on price development. The prevailing insecurity in food producing areas and the high cost of transportation of farm produce are also contributing to this trend.
Members were, therefore, not oblivious to the urgent benefit of addressing these challenges, as it will offer a sustainable solution to the persistent pressure on food prices.
The apex bank noted the increasing activities of middlemen, who often finance smallholder farmers, aggregate, hoard, and move farm produce across the border to neighbouring countries.
The Committee suggested the need to put in check such activities in order to address the food supply deficit in the Nigerian market to moderate food prices. Food inflation has remained elevated in Nigeria due to insecurity and a lower harvest. There is also negative impacts from rising logistic costs as a result of the removal of subsidies.
The authority resolved to sustain collaboration with the fiscal authority to ensure that inflationary pressure is subdued. In addition, the Committee expressed optimism with the recent stop gap measures by the Federal Government to bridge the food supply deficit.
In particular, the 150-day duty free import window for food commodities (maize, husked brown rice, wheat and cowpeas), amongst others, will moderate domestic food prices.
“It is noteworthy that these measures will not lead to direct injection of liquidity into the economy as to cause further inflation.
“While the measure is a welcome development and may prove effective in the short run, it is expedient that it is implemented with a defined exit strategy to avert a possible rollback of the recent gains in domestic food production”, the CBN said.
The Bank said it is already engaging Development Finance institutions like the Bank of Industry (BOI) to ensure adequate support to industries with a focus on Small and Medium Scale Enterprises (SMEs).
The MPC noted the narrowing spread between the various foreign exchange segments of the market, an indication of price discovery and improved market efficiency, thus reducing opportunities for arbitrage and speculation.
The Committee noted that the increase in the level of external reserves would further build confidence for a more stable exchange rate and thus urged the Bank to explore available avenues to improve inflows, especially through diaspora remittances.
The monetary authority noted the efforts of the Federal Government and private sector towards improving domestic refining capacity as this is expected to reduce foreign exchange currently being expended on the importation of refined petroleum products.
The MPC noted the sustained resilience of the banking system, reflected in improvements of key financial soundness indicators (FSIs).
Members further encouraged the continued need for close monitoring of the system, as the implementation of the recapitalization exercise progresses. MPC re-emphasized its commitment to stay on course with its tightening cycle in view of the urgent need to address inflationary pressures. NAICOM Boss Affirms Insurance Sector’s Commitment to Grow $1trn Economy
