February 28, 2024

CBN jerks up benchmark interest rate to 22. 75 %

CBN New Capital Base

Yemi Cardoso, CBN Governor

•External Reserves rises to $34.5bn as reforms attract $2bn
•Clears another $400m backlog •Binance investigated for $26bn suspicious transactions
•MPR hike will hurt real sector — Analysts

By Babajide Komolafe, Emma Ujah, Abuja Bureau Chief, Peter Egwuatu & Nkiru Nnorom

The Central Bank of Nigeria (CBN) yesterday raised its benchmark interest rate, the Monetary Policy Rate (MPR) by 400 basis points from 18.75 per cent to 22.75 per cent.

The CBN also adjusted the Asymmetric Corridor around the MPR to +100/-700 from +100/-300 around the MPR.
CBN Governor, Mr. Olayemi Cardoso, disclosed this while briefing journalists on the outcome of the Monetary Policy Committee, MPC, held yesterday in Abuja

Cardoso also disclosed that the MPC raised the Cash Reserve Ratio (CRR) of banks to 45% from 32 percent.
The MPC however, retained the Liquidity Ratio at 30 percent.

Cardoso said that the decision to jerk up the MPR was to tackle the high rate of inflation and the large volume of liquidity in the system.

He said, “The committee’s decisions were centred on the inflationary and exchange pressures, projected inflation and rising inflation expectations.

“Members were concerned about the persistent rise in the level of inflation and emphasised commitment to reverse the trend, as the balance of risks lean towards rising inflation.

“The committee, however, acknowledged the trade-off between the pursuit of output growth and the taming inflation but was convinced that an enduring output expansion is possible only in an environment of stable economy.

“The balance of the argument was in favour of a considerable rate hike to drive down inflation substantially.”

Insecurity driving inflation

On the effects of insecurity on inflation, Cardoso said, “Members considered several factors driving inflation such as insecurity and infrastructure deficit and noted the role of fiscal policy in addressing these shortfalls while reiterating the commitment of monetary policy support.”

He noted the negative impact of insecurity on inflation, especially given the disruption of farming in many food-producing zones of the country.

External Reserves rise to $34.5b

According to the governor, “Gross external reserves stood at $34.51 billion on February 20, 2024, compared with $32.23 billion at end-January 2024. The improvement was driven by reforms in the foreign exchange market and an increase in oil production amongst others.”

Reforms attract $2bn

“We should get to a level where the market can function properly and be able to attract liquidity. Recently, past we have been able to, at least using certain monetary tools, we have been able to begin to attract liquidity into the system.

“For example, you may be aware that more recently we attracted, over a short period of time, up to $2 billion, as a result of tools that we used to calibrate interest rate. The market moved towards greater transparency.”

Clears another $400m backlog

The Governor said that his administration stood to clear the backlog of all verified FX claims, revealing an additional $ 400 million had just been paid out.

In addition, he said that he was committed to meeting outstanding genuine requirements.

$26bn suspicious transactions

On cryptocurrency, Mr. Cardoso said that CBN had a responsibility to protect Nigerians.
The governor said, “We collaborate with other government agencies in this regard. And through collaboration, we have confirmed some of our fears. Our concern that certain practices go on that indicate illicit flows going through a number of these entities, as suspicious flows at best.

“In the case of Binance, in the last year alone, $26 billion has passed through Binance Nigeria from sources and users whom we cannot adequately identify.

“There is a lot that is going on now between the EFCC, the police and the Office of the NSA and in due course, as we have information to share, we will share with the public.”

Analysts highlight impact of the economy

Meanwhile, financial analysts have said that the decision of the MPR will lead to higher interest rates in the fixed-income markets, naira appreciation, and enhanced foreign investment inflows. They however said that the hike in MPR will increase the cost of borrowings, and reduce lending to the real sector with the risk of lower growth in the industrial and agriculture sectors.

Lending to real sector will decline

Commenting, Co-Founder, of Comercio Partners Limited, Nnamdi Nwizu, said: “I expect to see rates of government securities go up, especially as banks will need to get liquidity to meet the new CRR requirements. “We might see lending to the real sector slow and also see issuance of Commercial paper and borrowing by companies also slow as the cost of borrowing jumps.

“Hopefully we see the Naira strengthen as Foreign Portfolio Investments, FPIs’ come in to take advantage of higher rates and locals also find the rates more attractive.”

Higher yields on Fixed Income instruments

Also speaking, the Head, of Equity Research, FBNQuest Securities Limited, Tunde Abioye, said: “I expect that the monetary policy tightening and restrictive financial conditions will lead to a gradual appreciation of the naira in the near term.

“As expected, the fixed income market is expected to start reflecting the rate hike from tomorrow. As such, yields are bound to be elevated. This will be negative for existing holders of fixed-income securities. However the high yields will be positive for FI purchases.

“Also, I expect the equity market to take a hit from the MPC’s decision, as investors rotate out of equities into fixed income.

Also, banks should benefit from the rise in market yields.”

Lower growth from Industry, Agric sector

However, Prof Uche Uwaleke, President, Association of Capital Market Academics of Nigeria, ACMAN, highlighted the negative impact of the hike in interest rates on the real sector of the economy.

He said: “I pity the real sectors of the economy.

“The implication is that for every deposit in the bank, CRR takes 45% of it while the Liquidity ratio takes 30%. So it is only 25% of the deposit that banks can lend!

This has negative implications for access to credit, cost of capital for firms, cost of debt service by the government and asset quality of banks.

“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, expect lower GDP numbers especially from Agric and Industry sectors as well as a surge in unemployment levels.”

MPC hike will hurt real sector- CPPE

Similarly, Director General, Center for Promotion of Private Enterprise, CPPE, Muda Yusuf, said: “The outcome of the Monetary Policy Committee [MPC]s meeting of 27th February 2024 would hurt the real sector of the economy which is already contending with numerous macroeconomic challenges.

“The increase of the Monetary Policy Rate [MPR] from 18.75% to 22.5%; and cash Reserve Ratio [CRR] from 32.5% to 45% pose a major risk to the financial intermediation role of banks in the Nigerian economy. The increase would constrain the capacity of banks to support economic growth and investment, especially in the real sector of the economy because the increases are quite significant.

“The outcome of the MPC’s meeting would hurt the real sector of the economy which is already contending with numerous macroeconomic challenges.

“The increase of MPR from 18.75% to 22.5%; and CRR from 32.5% to 45% pose a major risk to the financial intermediation role of banks in the Nigerian economy.

“The increase would constrain the capacity of banks to support economic growth and investment, especially in the real sector of the economy because the increases are quite significant.”

Decision by MPC may precipitate recession – David Adonri

Also speaking, David Adonri, Vice Chairman, Highcap Securities, who said that the hike in both the MPR and CRR to 22.75 per cent and 45 per cent respectively is indicative of the precarious state of the economy, insisted that the move may precipitate recession if the situation is not carefully managed.

He further argued that economic growth may not be feasible;e despite the CBN’s move in the absence of complementary fiscal policies to boost local supplies.

He said: “The quantum leap of MPR to 22.75% and CRR to 45% signals further tightening of monetary policy. That means that the economy is in such a precarious state that drastic measures have to be taken.

“While a hike in the risk-free rate was predicted, no one envisaged that the contractionary monetary policy would extend to change in the bank’s reserve requirement as a normalization tool because many considered the previous figure of 32.5% as already excessive.

“These changes in monetary policy are inevitable to an extent, because the excessive liquidity in the financial sector has mainly come from reckless Ways & Means Advances and actions must be taken to disable their menace on the financial economy.

“Beyond that, however, monetary policy tools have so far failed to rein in Nigeria’s stubborn inflation, probably, because the causative factors are cost push, a situation that monetary policy tools which are short-term demand management strategies are not designed for.

“I fear that this reaction by MPC may be an overkill that can precipitate a recession if the situation is not carefully managed. In the next few days, we shall start seeing the impact of these policies on asset prices in the Capital Market and Foreign Exchange Market.

“While these policies remain in effect, economic growth may not be feasible in the short term since the intervention of fiscal policies to boost local supply has a medium to long term horizon.”