John Omachonu
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) may be forced to tinker with the anchor rate for the first time after over two years as global inflation concerns and responses may put the local economy in a precarious situation.
The Monetary Policy Rate, (MPR) is the anchor rate set to influence availability and cost of money and credit by banks to promote healthier economy.
It serves as the anchor the banks use in their borrowing of funds to customers in order to affect the evolution of the main monetary valuables in the economy
These could be in the areas consumer prices, exchange rate or credit expansion, among others. The MPR currently is at 11.5 percent.
And, of course, politics that has been part of human endeavours, and with growing heights in the country and some individuals, will be an added agenda at next week’s meeting.
Whether the members of the highest policy making committee of CBN established to facilitate the attainment of objective of price stability and support economic policy of the federal government likes it or not, the May 23 and 24 meeting will overtly or covertly discuss political matters.
This is because, the 12- member committee saddled with the responsibility of reviewing economic and financial conditions in the economy, determining appropriate policy stance, among others, is chaired by the Governor of CBN, and in this case, Godwin Emefiele, who was mentioned recently as one of the presidential aspirants under the ruling All Progressives Party, (APC).
Whether Emefiele has withdrawn or not, the impression has been created that for the first time the occupant of that exalted position, expected to be apolitical, allegedly delved into partisan politics.
Sources close to the regulatory bank told the platform that while tension and apprehension have gripped the staff of the regulatory bank over the likely next action of the federal government, some members of the committee are poised for action and the issue will form part of the top agenda at the meeting next week.
It was further learnt that some members would request for closer look at the CBN Act, with a view to ascertaining the appropriateness or otherwise of the involvement of the chairman in partisan politics, moving foreward.
According to Bismarck Rewane, for Nigerians, recent and current happenings in the country show that these are not only interesting but also challenging and daunting times.
Consequently, making things more complicated is the confluence of political imponderables, drifting leadership and conflicted policy makers.
The shocking but inevitable marching orders by the president to political appointees to quit their plum jobs to essentially come out of their political closets, is another unknown in the quadratic political calculus.
In the current edition of the LBS Breakfast Session, Rewane and the FDC Think Tank said, “In the forex market, the Naira is close to the psychological resistance of N600/$ and Diaspora flows are falling below expectations. The markets are likely to be jittery if the policy making vacuum is filled with incompetent and compromised technocrats.
One thing is clear, Headline inflation in Nigeria is projected to rise above 16.2% this month (April) and could force the MPC to tighten its stance in May thereby forcing asset values down.”
Inflation has been experiencing upward trends, reducing the power of consumers. For instance, in January, 2022, it was 15.60 percent, February, 15.70 percent, March, 15.9 percent and April 16.8 percent, with propensity to continue as energy crisis, currency pressures and hike in global commodity prices due to Russian invasion of Ukraine continues
In fact, the April figure is the 3rd consecutive monthly increase and the highest level in seven months; it was 15.99% in October 2021.
Whilst official headline inflation is represented at 15.92%, the actual reality of things paints a much higher number.
The MPC is widely expected by most analysts to raise interest rates at its meetings in May. This is likely to be the commencement of a tightening cycle and could see the CBN use open market operations mainly for liquidity management purposes as against the unorthodox approach adopted in the last few years.
The committee’s decision to tighten would also come after several nations both in advanced and emerging economies have accepted a much more aggressive tightening stance.
The implications of higher interest rates on the cost of borrowing return on savings and stock market valuations are already causing some jitters in money and capital markets.
Global inflation is at record levels, in the US, it is at a 40 year high, in the UK and EU, it is at a 3-decade high.
So in Nigeria and Sub-Saharan Africa we expect the
inflationary spiral to continue.
The rapidly rising inflation rate is forcing most Central banks in both emerging and advanced economies to adopt a tighter monetary policy stance to reign in inflationary pressure and restore some level of price stability.
The most recent is the 50bps increase in the US Fed interest rates to 0.75%-1.0%, the highest hike in over two decades. The Bank of England also raised its policy rate by 25bps (fourth consecutive time).
Expectations are high on the Nigerian MPC if only to militate against the likely capital flight occasioned by Fed’s action.
Most analysts are of the opinion that a 50bps increase will be needed to taper inflationary pressures, particularly the food inflation.
This largely reflects weak aggregate demand as consumer disposable income remained squeezed.
Most African countries are grappling with the twin shock of rising inflation and high debt levels.
According to the Standard Bank Group, five of Africa’s heavily-indebted countries, including Ghana, Kenya, Angola, Ethiopia and Zambia are at the verge of debt distress.
This could become worse as most advanced economies adopt a tighter monetary policy stance, pushing up debt service costs.
The surge in costs of diesel, wheat and other imported materials, combined with high interest rates, U.S. dollar shortages and soaring inflation, among others is crippling production in Africa’s most-populous country.
How Rising Interest Rates In US Will Hinder Economies Of Nigeria, Others
The Fed Reserves recently raised its benchmark short-term rate by half a percentage point to its highest level since the pandemic hit two years ago, and signaled that more rate hikes will come.
When the Federal Reserve raises interest rates as it did recently, the impact doesn’t stop with U.S. homebuyers paying more for mortgages or Main Street business owners facing costlier bank loans, according to AFP.
The fallout can be felt beyond America’s borders, farmers in Mozambique, manufacturers and traders in Nigeria and families in poorer countries around the world.
The impacts abroad range from higher borrowing costs to depreciating currencies.
The U.S. rate hikes can deliver long-distance damage in a number of ways. First, they could slow the American economy and reduce U.S. consumers’ appetite for foreign goods.
They also affect global investment: As rates rise in the U.S, safer American government and corporate bonds start looking more attractive to global investors. So they can pull money out of poor and middle-income countries and invest it in the United States.
Those shifts drive up the U.S. dollar and push down currencies in the developing world, like Nigeria.
Falling currencies can cause problems such as making it more expensive to pay for imported food and other products. That is especially worrisome at a time when supply chain bottlenecks and the war in Ukraine have already disrupted shipments of grain and fertilizer and pushed up food prices worldwide to alarming levels.
Despite the risks of collateral damage, the Fed is expected to raise rates several more times this year to combat resurgent inflation in the United States.
The only option for a country like Nigeria to defend its sinking currency would be for CBN to likely raise the rates.
This is however, not without its consequences like slowing growth, wiping out jobs and squeezing business borrowers.
It can also make the government with high debt profile to spend more of their budgets on interest payments and less on things like catering for the poor and vulnerable, which is rather very far for the average Nigerians.
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Nigeria, which depends heavily on imported oil and other commodities, makes her vulnerable to external financial shocks.
The situation becomes more worrisome as some of the foreign reserves are used to defend the naira at the expense of accreting foreign reserves that CBN could use to otherwise meet foreign debt payments in a crisis period.
