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Nigerians prefer high interest rates to high inflation – CBN survey

By Babajide Komolafe
*As Govt borrowing crowds out private sector
Confronted with a choice between high interest rate and high inflation, Nigerians prefer higher interest rates, according to a consumer survey conducted by the Central Bank of Nigeria.

Deputy Governor, Financial Sector Surveillance, Mr. Kingsley Moghalu disclosed this during the Monetary Policy Committee (MPC) meeting held last week.

It would be recalled that last week the CBN increased the Monetary Policy Rate (MPR) by 100 basis points to 7.5 per cent, following unanimous vote for increased monetary tightening  by the  MPC.

Justifying the need to raise the MPR, Moghalu said that, “the case for increasing the interest rate is supported not just by the potential inflationary pressures the recurrent expenditure-dominated 2011 budget will likely bring, but also by the results of the Quarter 1 2011 Consumer Expectations and Inflation Attitude Survey Report prepared for the Monetary Policy Committee.

Clearly, Nigerians do not want increased inflation. A majority of the individuals surveyed believed Nigeria’s economy would be weakened by fast-rising prices. While they would prefer lower interest rates, confronted with a choice between higher interest rates and high inflation, they would opt for higher interest rates.

Lowering expectations about inflation is critical to lowering inflation in fact. A marked increase in the MPR will help contain inflationary trends, among other reasons because it will send a strong anti-inflationary signal.”

Two  key  factors that motivated the decision of the MPC to raise the MPR was the recently passed budget 2011 and the borrowing activities of the government.  All the members of the MPC severely criticised the budget and also noted this may occasion more government borrowing, which is already crowding out the private sector.

In his submission, Deputy Governor, Operations, Mr. Tunde Lemo said: “The fiscal activities in my view are expansionary and not in line with fiscal  consolidation advocated by MPC in January 2011.

The Federal Government budget of N4.9 trillion as well as the total budgets of the 36 states may result in significant growth in public debts with the resultant crowding out of the private sector.

The benchmark price of USD75 per barrel adopted in the Federal Budget may be too ambitious as oil price is volatile and significant shock may result in increase in government’s domestic borrowing.

Already, staff reports revealed a decline in aggregate credit to the private sector in January 2011 whereas credits to federal, state and local governments grew by almost 60%. The growth plan of 2011 may therefore be impaired.”

A member of the MPC,  Professor   Uche Chibuike warned that monetary policy in the country might soon become ineffective unless the apex bank adopts a more combative posture as financial adviser to the government. He said: “I also recommend that the Central Bank should adopt a more combative posture in its role as financial adviser to the government.

This has become necessary because unless the fiscal management of the economy improves, we will soon get to the point where monetary policy will become an ineffective tool for stemming inflation and ensuring stable exchange rates both of which are central to the attainment of price stability”.


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