The decision by the Central Bank of Nigeria (CBN) to raise the monetary policy rate (MPR) by 400 basis points in one fell swoop as an overkill, and economist and Nigeria’s first Professor of Capital Market, Uche Uwaleke. has said.
At the end of its maiden meeting under Olayemi Cardoso leadership as the governor of the CBN, the Monetary Policy Committee (MPC) on Tuesday raised the MPR by 400 basis points to 22.75 percent, from 18.75 percent and adjusted the asymmetric corridor around the MPR to +100/-700 from +100/-300 basis points.
Also, the Committee raised the Cash Reserve Ratio (CRR) from 32.5 percent to 45.0 percent, while retaining the Liquidity Ratio at 30 percent.
Announcing the decision in his office in Abuja, the CBN governor said it was the outcome of a unanimous resolution, as all 12 members of the Committee who attended the meeting agreed.
He said the considerations of the committee centered on the current escalating inflationary trend and exchange rate pressures, as members were concerned about the spiraling inflation and the need to reverse the trend as soon as possible.
Although members acknowledged the trade-off between the pursuit of output growth and taming inflation, he said they stressed the need to transition to an inflation-targeting framework to address the persistent pressures in the economy
“In the opinion of the Committee, the options available for decision was to either hold or hike the policy rate to offset the persisting inflationary pressure.
“Considering the option of a hold policy, the evidence revealed that previous policy rate hikes have slowed the rise in inflationary pressure, but not to a desirable extent,” he said in the communique read at the end of the meeting.
He said members considered various scenarios of hold and hike, concluding that inflation could become more persistent in the medium term and thus pose more regulatory challenges if not effectively anchored.
The balance of the argument, he said leaned in favour of a significant policy rate hike to drive down inflation substantially.
But, Uwaleke, who is the Special Adviser to the Chairman of the Senate Committee on Banking, Insurance and Other Financial Institutions, said rather than hike the rate by a whopping 400 basis points, the committee should not have raised the rate by any more than 200 basis points since they have another opportunity to meet next month to review the impact.
“The Committee did not stop at MPR. They also jerked up the CRR to 45 percent, from the previous level of 32.5 percent, which was among the highest in Sub-Saharan Africa.
“The implication is that for every deposit in the bank, CRR will take 45 percent, while Liquidity Ratio will take 30 percent. So, it is only 25 percent of the deposit that the banks can lend to customers.
“This has negative implications for access to credit, cost of capital for businesses, cost of debt service by the government, and asset quality of banks,” Uwaleke explained.
The former member of the Presidential Committee on Fiscal Policy and Tax Reforms, who is also the Director of the Institute of Capital Market Studies at the Nasarawa State University, Keffi said although the CBN Governor had assured that policies of the apex bank would be evidence-based under his leadership, he said he did not have any empirical outcomes to support the latest aggressive move.
He expressed pity for the real sectors of the economy, saying Nigerians should expect banks to quickly reprice their loans with negative consequences for non-performing loans and financial soundness indicators.
“By this overkill on the economy in a bid to crash elevated inflation, which by the way has numerous non-monetary factors driving it, output is bound to shrink. So, Nigerians should expect lower gross domestic product (GDP) numbers, especially from the Agriculture and Industry sectors as well as a surge in unemployment levels. This is not a welcome development,” he said
During the briefing, Cardoso told reporters that apex bank he and his team at the apex bank should not be held responsible for the current spiraling inflation and the country’s economic calamity.
He said the current CBN management came when the bank was enmeshed in a serious crisis of confidence, adding that since he assumed office, he has been trying to establish normalcy in the fiscal and monetary policies, which have started yielding positive results.
“I think it is very important for Nigerians to understand that I, as the Central Bank governor, and my team, are not responsible for the woes that we have today. We are part of the solution,” Cardoso said.
“We are determined to ensure that we work hard to get out of the mess that Nigeria is in. We assumed responsibility at a time of crisis of confidence, and you may all want to go to bed and wish that crisis of confidence was not there. But it was, and we can’t turn back the clock.
“All we can do is do the difficult things to make a bad situation better. And I do believe that the efforts that we are making are beginning to bring back confidence, because, to be frank, without confidence in your business, you are not going to get far,” he said.
