Apex Bank in Nigeria sets to curb inflation, increasing banks’ incentive ….

By Babagana Jidda Kanempress
26th July 2023

The Central Bank of Nigeria (CBN), slowed down on its interest rate hike to 25 basis points (bpts) – the smallest since the start of the anti-inflation war in May 2022, bringing the Monetary Policy Rate (MPR) to 18.75 per cent, it adjusted the asymmetry corridor from +100/-700 to +100/-300.

The adjustment translates to the banks in Nigeria lending to the Central Bank of Nigeria (CBN) at MPR less 300 basis points through the discount window.

The strategic move in other words restrict credit and cap liquidity. The adjustment could restrict credit flow, as other financial analysts, are of the opinion that such would affect local production negatively.

The hike came amid the downgrade of Nigeria’s growth prospect to 3.2 per cent by the International Monetary Fund (IMF).

The Acting Governor of CBN, Folashodun Sonubi, after the Monetary Policy Committee (MPC) meeting in Abuja, highlighted the rising cost of food as a key driver of inflation.

“The committee remains cautious in arriving at a policy decision as members noted, the need to continue to support investment which will ultimately lead to the recovery of output growth. The balance of these arguments is in favour of a moderate rate hike to sustain efforts of anchoring inflation expectations, narrow the negative real interest rate gap and improve investor confidence, “ Shonubi said.

The Monetary Policy Committee was resolved by the majority to raise the monetary policy rates. Six members voted to raise the monetary policy rate. Four by 25 basis points, while two by 50 basis points. Five members voted to hold the monetary policy rate constant. All members voted to narrow the asymmetric corridor from plus 100 to minus 700 basis points to a new level of plus 100 and minus 300 basis points around the MPR. The MPR voted to raise the policy rate by 25 basis points from 18.5 to 18.75 per cent adjust the symmetric corridor to plus 100 minus 300 basis points and retained the CRR at 32.5 per cent and retain the liquidity ratio at 30 per cent.”

The Monetary Policy Committee urged the central bank to sustain its macro potential surveillance over the banking system.

Sonubi said that Monetary Policy Committee was confronted with only two policy options to hold or hike the policy rates to offset the moderate increase in headline inflation, standing at 22.79 per cent in June.

He said that Monetary Policy Committee members agreed that the previous rate hikes had indeed greatly moderated the pace of price increases.

In reaction to the decisions of the Monetary Policy Committee, the Chief Executive Officer of Dairy Hills Limited, Kelvin Emmanuel acknowledges increasing the MPR to tighten monetary policy as a disincentive for lending to the real sector of the economy.

“The decision to tighten the asymmetric corridor to +100-300 is a tool to encourage banks to bring in more deposits to the Central Bank through an increase in the standing deposit rate. I was expecting the MPC to either tighten the corridor or reduce the Cash Reserve Ratio from 32.5 per cent. Choosing to raise the standing deposit rate in the corridor is a welcome development for reducing cash supply as a tool to rein in inflation,” Emmanuel said.

He admitted that he does not expect the GDP growth rate to exceed three per cent for year 2023 from the current 2.31 per cent growth rate because the impact of the liberalization of the forex markets on petrol prices will reduce the per capita income of Nigerians and lead to demand destruction for vast swathes of the economy.

Also, Professor Uche Uwaleke described the decision to increase 25 basis points to 18.75 per cent as efforts to thread a middle-of-the-road path.

“The trepid increase by just 25 basis points to 18.75 per cent is an acknowledgment of the fact that there’s very little the CBN can do to tame supply-side-induced inflation via the policy rate,” Professor Uwaleke said.

The Central Bank of Nigeria had previously borrowed from commercial banks at MPR less 700 basis points (seven per cent).

Now commercial banks in Nigeria would now earn 15.75 per cent. The banks earned 11.5 per cent from the standard deposit facility (SDF).

Nigerian President Bola Tinubu had promised a low-interest rate as foundation for a robust credit economy, a signal of likely rambling in the responsibilities of the monetary authority as guaranteed by the CBN Act.

The hike is a contradiction of President Tinubu’s promise at his inaugural speech.