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CBN Tinkers With Fresh Interest Rate Hikes

CBN Tinkers With Fresh Interest Rate Hikes

Financial analysts have expressed reservations on the possibility of members of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) resolving in subsequent meetings in the year to hike interest rates further.

Almost two months after members of MPC resolved to hike the monetary policy rate by 150 basis points to 13 percent, the major question from analysts is if Nigeria can handle higher interest rate increases which are still likely in the year.

The major worry is that of high inflation as it is a known fact that persistently high inflation is a key macroeconomic weakness, contributing to Nigeria’s relatively modest growth rates and weighing on external liquidity by discouraging financial account inflows.

Lukman Otunuga, Senior Research analyst with FXTM, is of the opinion that “given how the CBN has triggered a tightening cycle, more hikes are expected down the road. Back in May, the central bank surprised markets with a 150-basis point rate hike. “With the CBN now focused on fighting inflation and interest rates rising rapidly across the globe, more hikes could be on the table to limit capital outflows.”

According to a report on Bloomberg, the CBN is expected to raise interest rates by 50 basis points two additional times in 2022 – bringing benchmark rates to 14 percent. The MPC members are to meet three more times before the end of the year. Theoretically, the rate hikes could limit inflation risks at a time when external and domestic factors are threatening Nigeria’s economy.

Ongoing geopolitical risks, extreme weather, and supply-chain disruptions could feed the inflation monster, while pre-election spending ahead of the general elections is likely to exacerbate the negative situation.

The decision by the CBN to raise the main policy interest rate sharply in May does not signal a fundamental shift in the country’s unorthodox monetary policy, which will continue to impede efforts to rein in inflation, says Fitch Ratings. “We believe Nigeria’s complex policy approach will be maintained at least until the next presidential election in February 2023.

A significant strengthening of macroeconomic performance appears unlikely in the near term, despite the supportive effects of higher global oil prices for the economy. “We had expected at least one interest-rate hike in 2022, but the 150 basis points increase in the main policy rate, to 13 percent, on 24 May was larger than we had anticipated. Further increases are possible, as officials with the Central Bank of Nigeria (CBN) have indicated a preference for real interest rates to be less steeply negative.

Moreover, we believe the CBN will use the Cash Reserve Ratio and the issuance of CBN special bills to tighten liquidity,” Fitch added. The CBN is using these discretionary measures to inject or withdraw liquidity from the financial system, as well as influencing borrowing costs for specific sectors through various loan guarantees and direct support facilities.

This, according to analysts, has made monetary policy difficult to gauge and created a segmented interest-rate environment, impeding the transmission of monetary policy. The CBN adopted the Investor and Exporter (IEFX) window as the official exchange rate in May 2021.

However, it continues to use administrative controls to manage the demand for foreign exchange, which has caused economically damaging shortages. Significantly, investigation by Daily Independent revealed that deposit money banks are expected to raise their deposit rates in compliance with the increased MPR by 150 basis points but it seems the reverse is the case.

Findings show that only two banks have reviewed their customers’ deposit rates but a cross section of analysts believe that some banks are not responding to the increase. They believe banks want to take undue advantage of customers by not increasing their rates, otherwise they should have done so immediately after the CBN raised MPR.

Taiwo Oyedele, head of tax and corporate advisory services at PwC, said given the rising inflation and interest rates locally and across the world, it is inevitable for banks to raise the interest rates on savings just as they have raised rates on their lending following the recent 150-basis-point upward adjustment to the MPR. “Yields are on the rise generally, so the increase in interest rate on savings is perhaps more to help the banks keep the deposits they currently have than it is to attract more deposits,” he said.


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