It was another audacious response from the Monetary Policy Committee (MPC), yesterday, as it increased the benchmarked interest rate by another 150 basis points (bps) in a fell swoop to rein in extreme inflation and manage an uncertain economic outlook.
This latest decision came on the back of previous back-to-back 100 bps and 150 bps that brought the Monetary Policy Rate (MPR) to 14 per cent. The increase has effectively raised the rate to 15.5 per cent, about a 20-year high, according to searches conducted by The Guardian. Going down memory lane, Nigeria’s MPR hit the highest point in the 1990s when it crossed 25 per cent. It slopped down to below 15 per cent and spiked again in 2002/2003, but remained below 20 per cent.
Before the recent aggressive tightening, the interest rate cooled off at 11.5 per cent from September 2020 when central banks across the world attempted to lower the cost of borrowing amid extra-ordinary expansionary monetary policies.
The interest rate poses danger for the real sector and the entire economy, which will have to bear the brunt of extra-high commercial interest rates. The maximum lending rate, according to the money market indicator gleaned from the Central Bank of Nigeria (CBN) stood at 18.5 per cent in August.
Yesterday, David Adonri, an investment banker, said the commercial rate could attempt to cross 30 per cent and effectively head to 35 per cent if the monetary authority continues to double down effect to check inflation.
Indeed, the CBN Governor, Godwin Emefiele, said via a communiqué to convey the hike yesterday that the MPC would be resolute in its efforts to bring inflation under manageable control.
Nigeria’s inflation has been uptick, hitting 20.5 per cent, close to 20-year high, last month. Experts have even argued that there is sufficient room for upside, as supply side constraints remain active.
Poor power supply, inefficient tax system, unpredictable foreign exchange rate and other challenges have left the country uncompetitive, having to depend on Asia and Europe for the most basic things.
But Adonri said the interest on bank deposits is a floodgate of large inflow into the banking sector, suggesting that lenders would have sufficient money to lend. Higher access to funds could mean cheaper money.
However, the money will not come cheap as CBN has also increased minimum interest rates on savings deposits to 30 per cent of MPR, meaning deposit money banks (DMBs) would henceforth pay as much as 4.66 per cent on deposits.
According to Adonri, private sector players would have to contend with an increasing crowding-out effect, as the going cost of borrowing will be unaffordable. He added that banks would be left with no option than to turn to the standing deposit facility (SDF) window of CBN and government bonds to offload their cash.
“This will eventually provide an opportunity for government to raise money to bridge its funding gap. This is because private sector operators cannot afford the interest rates banks will start charging going forward,” he said.
Read more at: https://guardian.ng/news/economy-in-rare-credit-squeeze-as-cbn-continues-with-20-year-high-interest/
