• Experts expect another 25 to 50 basis point hike
• Urges monetary, fiscal authorities to look beyond book theories
• Inflation intensity, negative interest yields to top consideration
With the headline inflation heading up again after a short-lived breather ahead of Christmas spending as well as the renewed pressure on the naira, the Monetary Policy Committee (MPC) appears set to announce another interest rate hike when it wraps up its meeting tomorrow.
The meeting takes off today in Abuja with sufficient grounds for an interest rate increase. At 33.88 per cent, the inflation rate is only 0.3 percentage points behind its three-decade high with September and October consumer price index (CPI) readings suggesting the panic is far from over.
The month-on-month CPI growth last month was the highest since March, also pointing to a spike in the intensity of the inflation movement pattern. The year-on-year (Y/Y) change in the core inflation was also at its multi-decade high at 28.37 per cent, suggesting the price crisis is also becoming more entrenched, beyond the feeds from food scarcity and energy cost surge.
That may have sent a signal to the monetary authority that the demand-push component has gained new momentum in the last few months – a reason to keep an eye on money balances.
Still, there is rising pressure on the naira, a trend the authority would not want to worsen with an expansionary policy gambit. Naira has been trading at the N1650/$ band at the official market while the parallel market remains at below N1700/$.
Sadly, the interest rate increase may imply treating business survival problems with benign neglect. Commercial interest rates are at about 35 per cent and heading to 40 per cent in some cases. With liquidity support to commercial banks currently pegged at 32.25 per cent (monetary policy rate (MPR) plus 500 basis points), a 50 basis points MPR increase will push the cost of liquidity to nearly 33 per cent for deposit money banks (DMBs) and contract their risk tolerance level.
An increase in MPR may not significantly increase commercial loan interest rates as they seem to have reached their elastic limits with no evidence of growth in response to the past three rate hikes, rate hike could ultimately worsen illiquidity, which has a similar effect as higher cost of lending, and further strangulate consumption.
In the first half of the year, inventory rose by 357.57 per cent to N1.24 trillion, highlighting how much consumption has contracted in recent times. For many Nigerians, the cost of living has become unbearable, with feeding and other basic needs turning into daily nightmares.
Hence, for an economy that is in dire need of fresh investment to create jobs, reduce the fast-growing poverty in the face of frightening inflation and increase consumption, the monetary authority is at a crossroads, more like between the jaw of a shark and the claws of a lion.
Indeed, the Central Bank of Nigeria (CBN) faces a costly trade-off in today’s meeting. Notwithstanding, interest rate hike seems to be its preferred option. Even if it is not for its merit, the CBN has committed to continue to tighten as long as inflation remains high. The authority may also be worried about the rising negative real rate of interest, which may be unsettling, especially for foreign fund managers and holders who the government has relentlessly prioritised.
Sadly, the strategy is now hitting the wall with the key transmission channels such as commercial interest, asset prices and exchange rates completely broken down.
Ultimately, the MPC may need to tread carefully. While inflation remains a challenge, blindly raising the anchor rate without considering the broader economic impacts could worsen the very problems the authority seeks to solve.
A balanced approach – one that stabilises the naira, addresses structural inflation drivers and supports economic growth – is needed, some economists have said. But the option itself appears more academic.
A financial expert, Ibrahim Oluwashola Owolabi, argued that the CBN would likely stick to its orthodox practice of raising the MPR by 50 to 25 basis points, which he said aligns with its belief that tightening monetary policy slows economic activities, reduces money multipliers, and tempers inflation.
“Rate hikes are thought to attract foreign portfolio inflows and bring temporary stability to the naira, he noted. However, Ibrahim’s assessment sharply dismissed the relevance of the hike option, suggesting that the CBN is addressing symptoms rather than the root causes of Nigeria’s inflation.
He emphasised that the country’s inflation crisis is predominantly supply-side driven—a mismatch between production and demand exacerbated by factors like insecurity, poor infrastructure and inefficiencies in supply chains.
“These issues lie outside the control of the central bank, as monetary policy is traditionally designed to manage demand-side imbalances,” he noted, adding that all previous efforts have failed to deliver results. He argues that fixing the supply-side disequilibrium requires robust institutional frameworks that Nigeria currently lacks. Hence, he noted, addressing inflation effectively would necessitate structural reforms, including improved logistics, enhanced agricultural output and better fiscal discipline.
He warned that the CBN’s current trajectory is a “negative sum game,” likely to do more harm than good. High interest rates may dampen economic activities further, leading to business closures, rising unemployment and reduced overall welfare.
Dr Yunana Bature, another expert charged the MPC to hold the rate while the fiscal authorities should minimise spending and place a high premium on import substitutions.
He added: “I think the NPC should hold the rate at this time. The NPC should take a pulse and study the microeconomic environment before deciding on the next line of action.
The fiscal authorities should also ensure they cut down on spending. Since increasing the rate has not tamed the inflation, there is so much money in circulation. The bulk of that is because the fiscal authorities are spending. Though Foreign Portfolio Investment (FPI) is coming in as a result of the high rate, the government must address exports. Things may not improve until Nigeria increases exports and earns forex.”
An economist, Kevin Emmanuel, said that the increment in the pump price and the recent further devaluation of the naira are factors that will leave the MPC no choice but to increase the rate by about 50 basis points.
“There are happenings within the economy that are likely going to push the MPC to increase the rate, but I do not expect more than 50 basis points,” he said. Emmanuel was quick to add that more than 50 basis points would not likely have any impact on the trajectory of the economy, saying,
“Adding more 50 basis points will not have any positive impact on the economy, just as the other previous additions failed to jumpstart the economy back to life,” he said.
The economist lamented the high mortality rate of manufacturing outfits with millions of jobs wiped off. On his part, Mohammed Ande, who is a retired banker, said that the MPC meetings no longer impact the business community.
“The news that the MPC will hold no longer excites anyone within the business community. What it does now is raise anxiety among the business community because MPC meetings are about raising rates. Since Yemi Cardoso came in as the governor of the apex bank, the MPC has raised rates by about 850 basis points. Where has that led us? We have witnessed more unemployment, more businesses have closed shop, and inflation has risen above 30 per cent while food inflation has topped 40 per cent. It does appear that the CBN has run out of ideas beyond raising rates to combat inflation,” he noted.
Tolulope Alayande also toed the same line with Ande and Emmanuel, saying Nigeria needs creative thinking outside textbook theories. He also noted that now that for microeconomics and macroeconomics prescriptions to work, the government must return to strict fiscal discipline, pass the tax reform bill, and halt all social interventions that have pushed more Nigerians into poverty.
He stated: “The government must reduce its spending. For me, social interventions such as conditional cash transfers need to stop immediately because that does not help anyone. I do not know of anyone who has benefitted from the programme and yet the Federal claims it has disbursed billions to the people. Who are they? Where are they residing? Nigerians need the details. The government should probe the disbursements. How can you distribute billions of naira to the so-called poorest of the poor and the number of extremely poor people keep increasing year-on-year?”
(Guardian)
