CBN and the need for economic stability
The inflation report among other reports by the National Bureau of Statistics (NBS) played a major part in the decisions of the Monetary Policy Committee (MPC) to hold interest rates. Omeiza Bilal, looks at how the Committee’s decision and its implication on the economy.
The decision of Central Bank of Nigeria (CBN) to retain major parameters came against the backdrop of recent drop in inflation rate, Foreign Exchange stability, the new vigour in the fight against insecurity and gradual reduction in the price Premium Motor Spirit (PMS) due to the intervention of local refineries.
According to the experts, this would help rejuvenate the economy in medium to long term. They say the collaboration of both the fiscal and monetary side of the country’s economy is yielding positive results.
The strategy employed by the Yemi Cardoso led Apex Bank fight rising inflation was through rate tightening. So, it is not surprising that interest rates was retained, apparently as a result recently published inflation rate.
The Cash Reserve Ratio (CRR) of Deposit Money Banks (DMBs) at 50 per cent, and that of Merchant Banks at 16 per cent as well as the Liquidity Ratio (LR) at 30 per cent are also retained.
The Apex Bank Governor was optimistic, having seen the result of previous decisions by the committee in addressing the challenges facing the country’s economy. He said the committee was unanimous in its decision to hold rates at current levels, having expressed satisfaction with recent macroeconomic developments, which were expected to positively impact price dynamics in the near to medium term.
Cardoso also said there had been greater confidence in the markets, a key ingredient that was missing in the equation.
All the “efforts are necessary, they are important because it will increase the confidence of investor, informed the decision of the fiscal authority in the country.
“If the trend continues, there would be ease in the tightening measures of the CBN, it would position the monetary authority in a better position to begin the process of moderating rates that will bring stability in the system, and these are what the investors want to see in an economy before in their investments,” he said.
Aligning with NBS
The Committee looked at the rebasing of the CPI by the National Bureau of Statistics (NBS) and considered the adjustments made to the weights of items in the CPI basket.
Cardoso insisted that the new methodology aligns with current consumption patterns and reflects the emerging economic landscape. He said the Committee remains optimistic that inflationary pressures will likely be on downward trend, based on the current relative stability in naira and gradual reductions in prices of Premium Motor Spirit (PMS).
The report posted by the Bureau of Statistics in January, shows that Nigeria’s annual inflation rate stood at 24.48 per cent, which is lower than the previous month’s figure due to the rebasing of Nigeria’s consumer price index (CPI).
The MPC also noted how increase in daily crude oil production and local refining capacity have enhance the current account balance and contributed significantly to Nigeria’s Foreign Exchange reserves.
The Committee also recognised the current measures taken by the CBN to enhance transparency and credibility in the foreign exchange market, including the implementation of the Electronic Foreign Exchange System (EFEMS) and the Nigerian Foreign Exchange Market (NFEM) FX Code.
Investors have opined that sustaining the policy initiatives will shore up investor’s confidence, leading to increased foreign direct and portfolio investments.
LCCI hails MPC decision
The Lagos Chamber of Commerce and Industry (LCCI) celebrated the Committees’ decisions. According to them, the move comes at a crucial time that the Nigerian economy is facing challenges such as increase inflation, commodity price hikes, FOREX crisis, and rising cost of production.
While the CBN intends to control inflation, the LCCI noted that the decision, particularly the fifth consecutive hike, raised concerns about its effectiveness in tackling the rising food inflation and the likely impact on businesses and economic growth. The economic think tank said that future MPC decisions will be primarily influenced by developments in the FX market and the inflation trend.
“While a potential rate cut may be considered at the next policy meeting as inflation continues its downward trend,” it said.
The LCCI urged the government to continue to make credit available to MSMEs to support their operations and production lines saying that “concessionary rates lower than CBN prevailing MPR, are hereby advocated for the MSMEs.
“The high lending rates make it challenging for businesses to access credit, especially for SMEs that are the backbone of the economy. The increase in production costs could lead to higher prices for goods and services, potentially affecting the competitiveness of Nigerian products in Africa and global markets respectively.
“Interest rates for many businesses are already over 35 per cent and should not increase further. The need to address food inflation, which is a significant factor contributing to the current inflation trend is imminent.”
They urged the CBN to invest more in development finance but criticized the CBN’s continued pursuit of an orthodox monitoring regime.
Analysts say that if the trend continues especially in exchange rate stability, further reduction in the price of PMS, increase in the fight against insecurity, and food price reduction, there are optimism that with a positive inflation outlook, CBN would further adjust its policies to reflect the improving economic landscape in the future.
