Several financial analysts have voiced concerns regarding the Central Bank of Nigeria’s (CBN) recent decision to raise the Monetary Policy Rate (MPR) by 50 basis points, despite emerging signs of economic improvement.
In an interview, the analysts warned that this rate hike could elevate borrowing costs, create additional pressure on businesses that rely on loans, and potentially impede growth within the private sector.
The Central Bank of Nigeria’s (CBN) Monetary Policy Committee made an unexpected decision, increasing the interest rate by 50 basis points, bringing the MPR to 27.25%.
This decision was announced by CBN Governor, Mr. Yemi Cardoso, who also serves as the Chairman of the Monetary Policy Committee, at the conclusion of their recent meeting in Abuja.
Additionally, the CBN raised the Cash Reserve Ratio (CRR) for commercial banks by 500 basis points, bringing it from 45% to 50%.
For merchant banks, the CRR was increased by 200 basis points to 16%. The Monetary Policy Committee also adjusted the asymmetric corridor around the MPR to +500 and -100 basis points, while maintaining the liquidity ratio at 30%.
Governor Cardoso explained that the decision to further tighten monetary policy was reached unanimously by the committee members.
The CBN justified its decision based on recent economic developments, particularly with respect to inflation and foreign exchange market stability.
Factors such as food inflation, widespread flooding, and increasing energy costs were cited as critical reasons necessitating a more restrictive monetary stance.
Experts stressed the need for coordinated fiscal interventions, alongside monetary policy, to curb inflation and support economic stability.
Mr. Victor Chiazor, Head of Research at FSL Securities Limited, expressed surprise at the CBN’s move to raise the MPR, given recent positive economic indicators.
He noted that before the meeting, Nigeria’s economy had shown signs of recovery, including two consecutive months of declining headline inflation, steady growth in foreign reserves, exchange rate stability, and falling interest rates—evidenced by the treasury bill stop rate declining to 18.59% in the last auction.
“These factors suggested that the period of aggressive inflationary pressure may have ended,” Chiazor explained.
He added that many expected the CBN to begin adjusting its policies to promote economic recovery, anticipating that the MPC would maintain its stance until the next meeting, allowing time to assess the impact of the recent increase in the pump price of Premium Motor Spirit (PMS).
However, the decision to raise the MPR is expected to have significant repercussions for the economy, particularly with respect to lending rates.
“The rate hike will increase borrowing costs, placing additional strain on businesses that depend on loans and potentially limiting the ability of the private sector to access capital,” Chiazor noted.
Given the MPR’s role as a benchmark for interest rates, an increase typically leads to higher borrowing costs across the financial system.
Chiazor further highlighted the potential adverse impact on publicly listed companies, noting that higher capital costs could erode profitability, particularly in sectors reliant on debt financing.
Nonetheless, he pointed out that the financial services sector, particularly banks, could benefit from the rate hike as lending rates increase.
In his remarks, Mr. Paul Uzum, Director at Halo Nigeria Capital Management Limited, provided insights into the CBN’s rationale, noting that Governor Cardoso had previously signaled a conventional approach to monetary policy, focusing on interest rate hikes to address inflationary pressures.
This strategy mirrors actions taken by central banks in the United States, the European Union, and the United Kingdom between 2022 and 2023, where rate hikes successfully reduced inflation before being gradually reversed.
Uzum expressed confidence that Nigeria’s inflation would similarly decrease in response to the tighter monetary policy.
However, he cautioned that while certain sectors, particularly those with ample liquidity, may benefit from the decision, others—such as manufacturing and consumer goods—could face increased challenges due to higher borrowing costs.
Uzum also warned that the stock market may react negatively to the rate hike, as higher interest rates typically make fixed-income investments, such as treasury bills and bonds, more attractive than equities.
Professor Uche Uwaleke, President of the Association of Capital Market Academics of Nigeria (ACMAN), voiced support for the CBN’s decision.
He emphasized that the MPC likely had access to data not available to the public, which informed the decision to tighten monetary policy further.
He underscored the importance of a joint effort between the monetary and fiscal authorities to effectively combat inflation, recommending that the government focus on reducing recurrent spending and promoting productivity, particularly through supporting small and medium-sized enterprises (SMEs).
Meanwhile, Mr. Olatunde Amolegbe, Managing Director of Arthur Steven Asset Management Limited and former President of the Chartered Institute of Stockbrokers (CIS), stated that the rate hike was inevitable, given the CBN’s inflation target and the recent surge in fuel prices.
He also cautioned that continued tightening could harm production and employment unless complemented by robust fiscal policies.
Mr. David Adonri, Managing Director of Highcap Securities, echoed these sentiments, noting that fiscal expansionary policies have contributed to persistent inflation, leaving the CBN with little choice but to continue tightening.
Without fiscal restraint, Adonri argued, monetary policy will remain the only viable tool to combat inflation.
