- Sell pressure in tier-one banks drags NGX All-Share Index down by 16bps
Nigerians have described the decision of the Monetary Policy Committee of the Central Bank of Nigeria to further increase the monetary policy rate by 150 basis points as inimical to economic growth and anti-productive in the current economic situation in the country.
The Governor of the apex bank, Yemi Cardoso on Tuesday, announced a raise in the MPR which is the benchmark lending rate for financial institutions by 150 basis points from 24.75 percent to 26.25 percent.
The announcement folloN8 wed a two-day meeting of the bank’s MPC which agreed to raise the MPR as a means of tackling inflation which rose to 33.69 percent in April 2024.
Briefing the media in Abuja at the end of the MPC meeting, Cardoso said, “The Monetary Policy Committee of the Central Bank of Nigeria held its 295th meeting on the 20th and 21st of May 2024 to review recent economic and financial developments and assess risks to the outlook.
While reacting to the decision, an economist, Chimere Iheonu, said the CBN’s decision to further raise MPR is a recipe for anarchy.
“Why continue to raise the MPR for a third time even though the policy failed to yield the expected result?
“Has the increase in MPR in the previous occasion delivered the expected results?
“Nigeria’s inflation is not responding to the MPR. At this point, the CBN might just be adding more to inflation through the supply side of the economy. You can’t use demand pull measures to curb cost push inflation,” he said.
Explaining why it is impossible for the CBN to tackle the current inflation via monetary policy, he said, “The CBN cannot do much with regards to cost push inflation. That is left in the hands of fiscal authorities and the government at large. The CBN is only making things worse off.
“Oil production is low, we still rely on subsistence farming, FDI is low, government wastage, inefficient bureaucracy and the CBN keeps increasing interest rates.
“The solution to stagflation (high inflation and unemployment) is not rising MPR but increased productivity,” Iheonu added.
According to him, “The fact that there is no tradeoff between inflation and unemployment is a clear indication that they shouldn’t follow this part. It’s so sad.
“Manufacturers have a large number of unsold inventories in their warehouses because of the sluggishness of the economy. Are there plans to reduce taxes, energy and tax subsidies and increased liquidity for manufacturers? Outside of this, the government is pursuing the wrong paths,” he added.
Also speaking, an Abuja-based businessman, James Itive, said the latest rate increment will worsen the credit market for manufacturers.
According to him, only deposit money banks will benefit from the decision.
“Off course deposit money banks will increase their interest rate immediately to almost 40 percent,” he said.
Expressing concerns over the implications, he said, “How do you expect companies to survive in such a situation? Most manufacturing companies will increase the downsizing of staff.”
“The CBN keeps crippling the economy for the benefit of a few. This is just in the interest of loan vendors to the detriment of businesses and poor people.
“How would business survive this? This is not looking good for the productive sector,” he lamented.
Also elaborating on the development, an economist and public affair analyst, Monday Osasah, said the MPR is a tool employed by Central Banks to control the money supply in the economy, as well as the lending and inflation rates.
“If a Central Bank is a mechanic, then screw drivers and spanners are the MPR. The 150 basis points simply mean 1.5 percent,” he explained.
Osasah stated that raising the MPR could curb inflation and woo investors, pointing out that, “investors like higher interest rates when they buy your government issued Treasury bills and Bonds.”
He noted that with inflation rate currently at 33.69 percent and interest rate now 26.25 percent, the situation is not palatable as “Investors stay away from a country when inflation rate is higher than interest rate.”
“But increasing the interest rate from 24.75 percent to 26.25 percent will also lead to slower economic growth, lower consumer spending, and higher interests on loans. So it’s a double-edged sword.
“The biggest driver of inflation in Nigeria is Food Inflation. Using monetary policy to target food inflation is counterproductive, because farmers cannot go to their farms.
“You need to fix the supply side first, before the policies can work. Food inflation can only be tackled when farmers return to their farms. This can only happen when you fight insecurity to a standstill.
“Again, raising Cash Reserve Ratio (CRR) to 45 percent means that banks are now required to retain 45 percent of customer’s cash deposits with the CBN.
“It means that First Bank or Access Bank must keep 45 percent of your cash deposits with the Central Bank of Nigeria.
“This way, banks will no longer retain huge amounts of cash in their vaults to lend to customers. Therefore, higher CRR discourages borrowing and lending at the same time.”
However, financial experts at Comercio Partners noted that, “Faced with a sharp naira slump since mid-April and 28-year high inflation of 33.69 percent, the MPC had little choice but to increase the MPR by 150 basis points, bringing it to 26.25 percent in a move to help restore price stability and positive real rates.
“This hawkish stance is designed to combat soaring inflation and stabilize the naira. While the recent moderation in monthly inflation figures offers a glimmer of hope, the persistent rise in headline inflation remains a significant concern.
“Despite the challenging economic climate, the CBN’s steadfast stance against inflation carries potential risks, including businesses struggling with rising production costs, diminishing demand, forex crises, and other pertinent challenges that may lead to the gradual erosion of economic vitality.”
According to their review, “Nigeria’s relationship between interest rates and inflation is anything but straightforward. Conventional wisdom suggests that higher interest rates should curb borrowing, reduce available credit, and ultimately lower inflation. However, the empirical evidence in Nigeria, as highlighted in the accompanying graph, tells a different story.
“The connection between interest rates and inflation in Nigeria is complex and unpredictable. While rate hikes are intended to control inflation, their impact can be slow and uncertain. Various other factors, such as supply chain disruptions and global food price increases, also play significant roles in driving inflation.
“In the short term, the effectiveness of rate hikes would be directed to attracting dollar inflow and strengthening the currency, as Nigeria is import-dependent. When the exchange rate strengthens, inflation should reduce.
Sell pressure in tier-one banks drags NGX Al-Share index down by 16bps
The impact of share offloading by equity investors in leading banks like GTCO, Zenith Bank and FBN Holdings, reduced the market capitalization of the Nigerian Exchange Limited by N89 billion, as the index slipped by 0.16 percent on Wednesday.
As a result, the year-to-date return fell to 31.23 percent, while market capitalization closed at ₦55.51trillion.
“Today, the domestic bourse slipped as the benchmark index closed 0.16% weaker at 98,128.00 points. Sell pressure in GTCO (-3.55%), ZENITHBANK (-4.62%) and FBNH (-0.44%) drove the market’s negative performance,” Analysts at Coronation Research noted in a report.
Analysis of Wednesday’s market activities showed trade turnover settled higher relative to the previous session, with the value of transactions up by 5.56 percent. A total of 271.71 million shares valued at ₦5.43 billion were exchanged in 7,383 deals. ACCEESSCORP (+0.29%) led the volume chart with 35.58 million units traded, while GTCO (-3.55%) led the value chart in deals worth ₦1.35 billion.
Market breadth closed negative at a 0.71-to-1 ratio with declining issues outnumbering advancing ones. MULTIVERSE (-9.82%) topped twenty (20) others on the laggard’s table, while TANTALIZER(+8.00%) led fourteen (14) others on the leader’s log.
