Experts call for realistic policy decisions, as CBN raises interest rate to 15%

Some financial experts have called on the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to adopt a more realistic approach to its policy decisions.

The MPC moved the benchmark interest to 13 per cent, 150 basis points above the previous rate three months ago. It is the first change since September 2020.

Reading the communique of the MPC’s 142nd meeting on Tuesday, CBN Governor, Mr Godwin Emefiele said the action was to tame the rising inflation rate in the country.

He, however, said that the rate on development finance loans will remain at five percent till 2023.

In pre-MPC meeting interviews with the News Agency of Nigeria (NAN), the experts counselled the MPC to take practical policy decisions to effectively tackle the country’s monetary and economic challenges.

A past President of the Chartered Institute of Bankers of Nigeria (CIBN), Mr Okechukwu Unegbu urged the committee to carry out extensive research on the economy before coming out with its parameters.

Unegbu said that the idea of retaining the same parameters for several months without any positive economic impact gave the impression that the MPC meetings were merely routine.

The MPC apparently considered this suggestion positively given that the benchmark interest is now 13 per cent from 11.5 per cent in its last nine meetings, while holding other parameters constant.

He urged the MPC to look inward and formulate home-grown policies that would slow down inflationary trend and engender real economic growth.

A 0.5 percentage points interest rate hike announced by the United States’ Federal Reserve earlier in the month reverberated around the globe, spurring other economies to hike rates.

The U.S. agency raised its benchmark interest rate to a target rate range of between 0.75 per cent and one per cent, the largest hike in 22 years. The decision followed a 0.25 percentage point increase in March, the first increase since December 2018.

In Nigeria, the asymmetric corridor has remained at +100/-700 Basic Points around the MPR, the Cash Reserve Ratio (CRR) remained at 27.50 per cent and the Liquidity Ratio remained at 30.00 per cent.

According to Unegbu, the MPC should observe and compare economic conditions preceding its last few meetings and the impact of its policy decisions afterwards.

“Retaining the same parameters for such a long time without visible improvements indicates that the committee, and the apex bank are not doing enough.

“Look at the inflation rate, look at the exchange rate, there has not been any appreciable improvement.

“They need to carry out a research and compare two or three past meetings to know the impact of their policy decisions”, he said.

Unegbu also advised the apex bank to cut down on its intervention in different economic sectors so as not to “cause dislocation in the monetary system”.

“CBN’s interventions have not changed anything; the interventions are not working.

“Look at the CBN appealing to farmers to pay back their loans. Does the apex bank have capacity to recover those loans?

“The beneficiaries do not see them as loans, but as their own share of the national cake,” he said.

An economist, Prof. Lanre Olaniyan argued that retaining the same parameters for the umpteenth time, in the midst of rising inflation and other economic challenges, means something is not right.

Olaniyan, a Professor of Economics at the University of Ibadan, urged the MPC to take cognisance of the impact of its prevailing parameters to be properly guided.

However, another economist, Dr Tope Fasua advised the MPC to be circumspect in its policy decisions so as not to worsen the situation.

“Except we want the CBN to be adventurous, if they increase the Monetary Policy Rate (MPR), it’s a cue for the Deposit Money Banks to increase lending rates.

“And, usually, lending rates will be increased a lot more than deposit rates.

“The manufacturers and other stakeholders will blame the apex bank for making their lives more difficult. But if they do that, the aim could also be to slow down inflation.

“The second point is that, if they reduce, inflation might continue to grow. If we want to be experimental we could push for a reduction in rates”, he suggested.

Fasua called for improved productivity in the country, adding that a reduction in the rates would boost productivity by encouraging people to borrow more from the banks, while depositing less.

“Our banks are fairly comfortable but we could do with a lot more productivity in the country, at the risk of a little more inflation”, he said.

NAN reports that at the last MPC meeting in March, the 10 members present were divided on the policy decisions and parameters to adopt.

Three members had voted to raise MPR by 25 basis points, one member voted to raise MPR by 50 basis points while six other members voted to hold all parameters constant.

According to Emefiele, the committee was of the view that increasing the rates during inflation could adversely impact on economic recovery and stifle expected investment expansion.

The CBN Governor also said that tightening would reverse the steady improvement recorded in credit expansion, and it will not necessarily tame inflation.

He added that the committee decided to adopt a precautionary policy stance that is consistent with the prevailing economic conditions.