Is Nigeria’s central bank confused?
The Central Bank’s Monetary Policy Committee issued a statement on Tuesday, May 24, 2022, announcing that it had raised its key monetary policy rate from 11.5% to 13%. This is the largest interest rate hike since July 2016.
In a statement where inflation was mentioned 28 times, the CBN cited rising inflation as the reason for the rate hike, saying the move was aimed at curbing runaway inflation and salvaging the continued depreciation of the naira. . Here are the reasons the CBN gave this time for raising the rates.
This will help moderate inflation and growth
“As for the need for tightening, MPC believes that tightening would help moderate the inflationary trade-off resulting from the steady pickup in growth so far. MPC also believes that tightening would help contain inflation before it does not take on a galloping trend, given the gradual increase in headline inflation (mom), especially with the sharp increase of 90 basis points in April 2022.”
This will reduce the interest rate margin
“Furthermore, MPC believes that tightening would reduce the negative real interest rate margin, improve market sentiment and restore investor confidence.”
Stemming capital outflows and stabilizing the exchange rate
“Similarly, members believe that the tightening would moderate the transmission of inflationary pressures to exchange rate depreciation and moderate the rate of reversal of capital flows, provide incentives for foreign capital inflows and support remittances. Finally, a tightening could moderate the government’s domestic borrowing, as the public debt service-to-revenue ratio has increased significantly in recent times, threatening debt sustainability.
These reasons contrast sharply with the CBN’s previous decision to keep rates unchanged at the committee’s last meeting. At the last MPC meeting held in March, CBN Governor Godwin Emefiele explained that a decision demanding an interest rate hike was essentially futile as it would not have a positive impact on the rate. of inflation.
“MPC also believes that no only a tightening would reverse the steady improvement in credit expansion, but he is also of the view that a tightening would not necessarily reduce inflationespecially where the marginal decline is not yet sustainable. – MPC press release
CBN Governor Godwin Emefiele was even more emphatic in his personal statements that a rate hike would disrupt economic growth.
“I recognize the recent unexpected rise in domestic inflation, which, although transitory, could justify a case for tightening. More importantly, the economic recovery is still fragile, while per capita income and the rate of unemployment are at unacceptable levels. My penchant today is to carefully balance the objective of price stability with the growth of output. Again, the dilemma of the trade-off between inflation and output remains unresolved. , and I believe a rate hike could disrupt our modest recovery,” Emefiele
Reading the conflicting statements that led to a change in tone in two months, it seems that the MPC has misjudged the level of hyperinflation in the economy. This is rather inexplicable considering the fact that the rising cost of goods and services has been widespread and pervasive for months, if not years. Why did the CBN have to wait so long to recognize this problem and respond with an interest rate hike? And now that he has raised his rates, will that now have a negative impact on economic growth?
First, the current rate hike is very unlikely to control inflation given the limited impact of interest rates on controlling inflation. In Nigeria, inflation is more of a supply than a demand issue, so interest rates have little or no impact on its fluctuation. This is clearly Nigeria’s exchange rate situation, which the bank has now acknowledged as a major factor that it has lost control of.
The apex bank may have come full circle after recognizing the impact that rate stability would have on Nigeria’s ability to attract foreign demand for its bonds. Yields on Nigeria’s 5-year Eurobonds crossed 11% last week, almost double their yield at issuance, suggesting the market was already pricing in hyperinflation. The parallel market exchange rate also depreciated to N610/$1 reflecting the impact of currency scarcity on the market. These two factors made it clear that the policies of the apex bank were inadequate and out of touch with the reality of the situation.
This latest about-face highlights some of the criticisms often leveled at the central bank and its monetary policies. The central objective of a central bank is price stability and full employment, two main mandates that we have failed to achieve over the years.