The recent decision by the Central Bank of Nigeria to raise interest rates is not expected to combat the overall increase in prices in the country, according to the Centre for the Promotion of Private Enterprise (CPPE).
In response to the monetary policy rate hike, CPPE’s Director-General, Muda Yusuf, stated that the move is likely to adversely affect the real sector of the economy.
With a 400 basis point increase, the country’s interest rate has now reached 22.75 per cent, up from 18.75 per cent, as reported by NewsNow.
CPPE expressed concern that previous monetary tightening measures by the CBN have not produced significant results in the past two years.
The organization attributed inflationary pressures to factors such as CBN’s N22.7 Ways and Means Loan to the federal government during the previous administration of President Muhammadu Buhari and ongoing security challenges.
CPPE called on the government to address security issues disrupting agricultural activities and continue reforms in the foreign exchange market to stabilize the exchange rate, reduce volatility, and encourage inflow of foreign exchange.
“The increase in interest rates could limit banks’ ability to support economic growth and investment, particularly in the real sector, given the substantial nature of the hikes,” CPPE mentioned.
While acknowledging that the CBN’s decision aligns with global central bank practices, CPPE believes it overlooks specific domestic circumstances. In Nigeria, factors driving inflation are primarily related to supply-side variables and the CBN’s financing methods.
The organization emphasized that despite previous monetary tightening efforts, inflation has continued to rise steadily.
CPPE highlighted challenges such as the surge in commodity prices, energy cost impacts, agricultural output disruptions due to insecurity, and global supply chain issues as critical risk factors to Nigeria’s inflation objectives.
The organization also pointed out that the high CRR has constrained bank lending, indicating that actual CRR rates for many banks might be as high as 50 per cent due to discretionary debts by the CBN.
Furthermore, CPPE noted the tight credit situation in the economy, with lending rates ranging from 25 to 30 per cent, affecting banks’ ability to fulfill their financial intermediary role adequately.
Highlighting the low level of financial inclusion in Nigeria and limited access to credit by households and MSMEs, CPPE stressed the need for tailored policy responses considering the unique characteristics of the Nigerian economy.
The organization suggested that the transmission effects of monetary policy in Nigeria remain weak, as price levels are more influenced by supply-side factors than interest rates.
CPPE warned that the recent significant hike in MPR to 22.7 per cent would increase the cost of credit for private sectors relying on bank loans, impacting their operational costs, product prices, and profit margins in a challenging business environment.
It urged the CBN to expedite the process of capitalizing development finance institutions to provide concessional financing options for the real sector and small businesses.