CBN and the imperative to control inflation

“Americans are fed up with almost everywhere they spend money. Gasoline prices are at record highs, food prices are rising, and housing is getting more expensive month by month. Lawmakers — especially Republicans — have lambasted the Federal Reserve for allowing inflation to hit 41-year highs, arguing that the central bank should have started raising interest rates much sooner” – BUSINESS INSIDER*

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), at its meeting in Lagos on Tuesday, August 2, 2022, announced an increase in the benchmark interest rate to 14% (MPR) in a deliberate effort to tame growth and inflation that could hamper the country’s economic growth.

While aware of the impact the decision could have on the manufacturing sector, another key determinant of economic growth, CBN felt it had to do so in a way to choose the lesser of two evils – weakening the manufacturing sector. economy with high interest on loanable funds; and ignoring the inflation spiral that is rapidly eating into the country’s savings.

CBN, learning from global trends and the experiences of advanced and developing economies, had to easily choose to fight a weakening manufacturing sector rather than let the rising, rippling impact of inflation weaken the economy at point that even the manufacturing sector itself is plunged into a worse crisis than if the MPR had not been raised.

CBN believed that any discomfort the manufacturing sector experiences as a result of the decision is a “lesser evil,” and whatever crisis it has on the economy could be much more manageable than if left alone. inflation run wild in all sectors of the economy. .

While announcing the 14% interest rate hike during the post-MPC briefing, CBN Governor Godwin Emefiele argued that the move was aimed at controlling inflation to ensure it does not delay not economic growth. He admitted that the MPC had not lost sight of the fact that rising interest rates could hurt manufacturing output, but he was also convinced that the impact of rising inflation on the country’s savings and, therefore, on the economy as a whole is much more serious and more important than any deterioration in manufacturing output.

“As you have all noticed, globally since the beginning of the year, the level of inflation has increased. To the extent that we see today, even in developed economies, the fact that even due to rising inflation, supply chain issues and the like, even most of these developed economies are already facing the threat of recession,” Emefiele said.

He cited the example of the United States, noting that with inflation in this advanced country rising from 2.5% in 2020 to 9.1%, according to the latest data, the Federal Reserve had to raise rates four times this year alone.

The CBN Governor cited two African examples, saying, “In Egypt, they have raised their rates three times this year because in 2020 the inflation rate was 7.3% and today it is 13, 2%. Ghana has increased the rate three times this year; inflation (in Ghana) has risen from 7.8% in 2020 to almost 30% today.

Emefiele observed that some of the world’s advanced economies, such as the United States and the European Union (EU), have suffered monumental declines in production.

He cited the example of the United States recording negative output in the first quarter of 2022, expressing concern that if the world’s largest economy recorded a second decline in output in the second quarter of 2022, it would plunge into recession, a development that could have serious repercussions on the global economy.

The CBN Governor noted that soaring inflation and its impact on growth was currently such a serious global concern that the MPC wasted no time in considering options to hold or cut of the MPR during its meeting.

Emefie said, “It’s (the surge in inflation) a very serious matter that MPC members take very seriously, because what you see is that if inflation continues to rise aggressively, it would undoubtedly begin to stunt the growth of any economy.

“And that is why, as you may have observed, most countries in the world, both developed and developing, have had to embark on very aggressive rate hikes in order to mitigate the effects of the crisis. ‘inflation.”

He reviewed efforts to fight inflation in Nigeria, saying, “What we have done in our own attempt to pursue a policy of price stability conducive to growth, we have tried over the past two meetings (MPC) to let rates the way. they are, while at the same time we have put a lot of emphasis on how to improve production growth.

“But, of course, with the inflation rate accelerating aggressively in Nigeria, we decided in May, after almost two and a half years or so, to raise rates by 150 basis points.”

The CBN Governor revealed the growth of inflation over the past two years: “In 2020, inflation in Nigeria was 12.13%, today the latest data released a few days ago places inflation at 18.6%. MPC members believe we can’t just hold rates, we can’t just keep watching inflation grow as it rises; something must be done to contain inflation.

“We conducted a very serious analysis, looking at the various data presented to us at this meeting and we felt that it was necessary to control inflation, not only because we want to look at what others are doing savings, but also because we need to do a lot more work on inflation, and that’s why MPC hasn’t even considered whether to keep rates constant or ease them.

Emefie said that although MPC members were aware that some analysts did not expect the committee to tighten up in a second consecutive meeting due to the fact that the decision would increase the cost of borrowing and hurt the manufacturing output, the committee would continue to tighten with any further push. in inflation.

He noted: “The important thing is that as long as we see inflation at a level that can retard growth, it needs to be addressed, while considering how to use development finance tools to push for improved That’s what we’re doing, and at the same time I want to signal that the MPC is very determined that if inflation continues at this rate, in a particularly aggressive way, we will continue to tighten.

The CBN Governor eased public fears over inflation, saying the apex bank would continue to explore all possible measures to moderate inflation, expressing hope that food prices would fall during the spring season. harvest this year. He couldn’t promise, however, that MPC would stop raising rates if inflation raged again.

As expected, the CBN rate hike immediately drew the ire of the Manufacturers Association of Nigeria (MAN)

MAN chief executive Segun Ajayi-Kadir described the rise as anti-manufacturing in a statement given the serious challenges the manufacturing sector has already tried to overcome.

“This is another level of increase in interest rates on loanable funds, which will undoubtedly increase the intensity of the crowding-out effect on private sector companies, as companies have less access to funds on the credit market.

“This will spur the upward revision of existing lending rates, which will drive costs north, intensify the demand crunch, increase manufacturing costs, exacerbate idle capital intensity and reduce capacity utilization. .”

The MAN helmsman urged: “The MPC must, in future adjustments to the MPR, take into consideration the underlying inflation trend rather than basing its decision on headline and food inflation.”

As expected, analysts at CSL Research reacted to the MPC rate hike, warning that a relentless rise in rates could stunt the country’s economic growth.

They said in a statement: ‘With the current narrative on inflation, the (MPC) committee was of the view that neither maintaining nor easing the policy parameters was an option, given the impact of mounting pressures inflationary inflation, which could begin to erode the moderate gains made in improving consumer purchasing power.

They said: “We remain of the view that a continued rise in rates is likely to limit the country’s fragile growth while achieving very little in terms of fighting inflation and attracting foreign flows.”

Also reacting, an economist, Dr. Muda Yusuf, described the rise in the MPC’s MPR as “unexpected, but not desirable”, saying that even though the MPC’s decision was in line with the trend of policy tightening by central banks around the world whole, it did not take into account the internal peculiarities of Nigeria.

“The further increase in MPR means that the cost of credit for the few recipients of bank credits and manufacturers who cannot access CBN counters will increase, impacting their operating costs, product prices and their profit margins,” observed Dr. Yusuf. , saying: “The stock market could be affected by the rise.”

He expressed doubts about the effectiveness of the rate in stemming inflation in Nigeria, given that “the main drivers of inflation in Nigeria are supply-side variables, not demand-side ones” , recalling that “the previous increase in the key rate of 150 basis points in May did not have a significant impact on the inflation figures. On the contrary, the general level of prices became even higher.

Despite the doubts expressed by analysts, industry operators, considering that most of the world’s central banks are implementing their respective measures to control inflation, readily endorsed the CBN’s interest rate hike to fight against inflation, which is rapidly eating away at the country’s savings.

Dambatta, a seasoned journalist, writes via [email protected]*

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