Inflation: OPS opposes fresh interest rate hike as MPC meets today

The Organised Private Sector, on Monday, warned against a hike in interest rates as the Central Bank of Nigeria’s Monetary Policy Committee continues its meeting in Abuja today.

This is the fourth MPC meeting of 2024 and at the end of every meeting before now, the committee has increased the benchmark interest rate in a bid to tame the rise in inflation.

The last increase was in May when the Monetary Policy Rate was hiked to 26.25 per cent from 24.75 per cent.

The Governor of CBN, Dr Olayemi Cardoso, had explained at different times that members of the committee were committed to taming inflation.

This came as some analysts stated that Nigeria’s persistent inflation which climbed to 34.19 per cent in June would leave the MPC with no choice but a rate hike at their meeting which commenced on Monday.

However, the Centre for the Promotion of Private Enterprise called on the apex bank to exercise caution in raising interest rates.

The Chief Executive Officer of CPPE, Dr Muda Yusuf, emphasised the need for a restrained approach to interest rate hikes.

While acknowledging the CBN’s efforts to stabilise the economy, Yusuf stressed the importance of minimal increases to avoid further burdening the private sector.

The CBN raised interest rates by 750 basis points in the last three Monetary Policy Committee meetings, increasing the rate from 18.75 per cent to 26.25 per cent.

This aggressive tightening cycle began in February with a 400 basis point hike, followed by additional increases of 200 basis points in March and 150 basis points in May.

Reacting to the ongoing MPC meeting, Yusuf stated, “Knowing the disposition of the Central Bank of Nigeria, given the fact that the bank has repeatedly affirmed its commitment to taming inflation, there is a very high probability that the MPC is likely to hike interest rates, although it may be marginal.

“My wish is that the central bank should put a hold on interest rate hikes for now. I believe that monetary policy instruments have been practically overstretched in this quest to tame inflation.”

Inflation

According to the National Bureau of Statistics, the headline inflation rate increased to 34.19 per cent relative to the May 2024 headline inflation rate, which was 33.95 per cent.

In June 2024, the inflation rate showed an increase of 0.24 per cent points when compared to the May 2024 headline inflation rate. On a year-on-year basis, the headline inflation rate was 11.40 per cent points higher than that of June 2023 (22.79 per cent).

Also, on a month-on-month basis, the headline inflation rate in June 2024 was 2.31 per cent, which was 0.17 per cent higher than the rate recorded in May 2024 (2.14 per cent) meaning that the rate of increase in the average price level was higher in June than in May.

As the MPC holds its meeting, Cowry Asset Management, in its weekly report, stated that while the slow acceleration in the headline inflation over the last four months indicated that the CBN’s tightening measures were permeating the economy, there might be side effects.

“Even as we expect to see a moderation in Nigeria’s inflation in the second half of the year, largely due to high base effects, some downside risks to this expectation exist, as consumer prices may face further pressure from higher minimum wage negotiations, significant depreciation of the naira, and high PMS prices due to ongoing fuel scarcity, which could negatively affect transportation costs.

“Looking ahead to the monetary policy committee of the CBN meeting to decide on various economic indicators while considering the current domestic and international economic outlook, we think the current inflationary pressure leaves the committee with little or no room for a rate tweak in favour of a loosening stance. Thus, a 25 basis points to 50bps hike in interest rates is anticipated,” the analysts projected.

NACCIMA reacts

The National President of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, Dele Oye, said a hike in the benchmark interest rate (Monetary Policy Rate) by the CBN can have several potential consequences for businesses.

He said, “Higher interest rates mean that loans and lines of credit become more expensive. This can increase the cost of financing for businesses, leading to higher operational costs.

“As borrowing becomes more expensive, businesses may delay or scale back on investments in expansion, new projects, or capital improvements. This can slow down business growth and innovation.

“In addition, higher interest rates can lead to increased borrowing costs for consumers as well, which can reduce their disposable income. This typically results in lower consumer spending, which can negatively impact businesses, particularly those in the retail and service sectors.”

Oye said businesses that rely heavily on debt to manage cash flow may find it more challenging to service their debt, leading to potential liquidity issues.

He added, “Higher interest rates can make bonds and other fixed-income investments more attractive compared to stocks. This may lead to a decline in stock prices, affecting businesses’ market valuations and their ability to raise capital through equity financing.

“An increase in the benchmark interest rate can strengthen the national currency. While this might reduce the cost of imports, it can make exports less competitive, potentially harming businesses that rely on international markets.

“While the primary goal of raising interest rates is often to control inflation, it can have a mixed impact on businesses. On one hand, controlling inflation helps maintain purchasing power and economic stability; on the other hand, the immediate effects of higher rates can strain business operations.”

Speaking on the impact on consumers’ confidence, the NACCIMA boss noted that if consumers perceive rate hikes as a sign of an overheating economy or a response to high inflation, their confidence may be shaken, leading to reduced spending and investment.

He warned, “Tighter monetary policy can lead to stricter lending standards, making it harder for businesses, especially small and medium-sized enterprises, to obtain credit.

“Uncertainty about future interest rate movements can make long-term planning more difficult for businesses. Companies may become more cautious in their strategic decisions, potentially slowing down growth and innovation.

“In summary, while an increase in the benchmark interest rate can help control inflation, it often introduces higher costs and increased uncertainty for businesses, which can have a range of negative impacts on their operations and growth prospects.”

On his part, the National President of the Association of Small Business Owners of Nigeria, Dr Femi Egbesola, said in advanced economies, a hike in interest rate is always a veritable tool to arrest inflation, adding that unfortunately, Nigeria’s economy defies that.

He said, “The consistent hike in MPR since the beginning of this year has not achieved any significant positive impact. Rather, it’s been wholesale negative.

“Yes, there was disinflation at some point, but it doesn’t correlate with the attendant damage done but the hike in interest rate. The OPS community strongly oppose any form of increase in interest rate in totality.

“We have not recovered from the colossal economic damage the recent past hikes have done on businesses, and it will be economically unwise to proceed on another.”

Egbesola called on policymakers and regulators to come to the reality that some policies and measures that work perfectly in some climes most often do not work in Nigeria.

The National Vice President of the Nigerian Association of Small-Scale Industrialists, Segun Kuti-George, said If there is an increase in the MPR, it means the cost of funds would increase and that would adversely affect those in the manufacturing sector.

“With the situation of things, I do not think they have much, I mean any alternative than to increase it. But any increase will spell greater doom for borrowing, for users of funds,” he stated.

Also reacting, a consultant with the Nigerian Economic Summit Group, Dr Ikenna Nwosu, urged the MPC to look for other ways of addressing inflation instead of increasing the interest rate.

“The essence of their increase is to control inflation according to what they said. But the question is, is that the only inflation control tool? It is not. You have to look for other ways to mop up liquidity.

“The CBN should go to the rural traders and do a public sensitisation for people to put their monies in the bank. The former CBN boss said that the amount of money in circulation outside the banking sector is big and that is what is leading to the inflation,” he said.