Businesses will still have to access bank credits at a higher interest rate as the Central Bank of Nigeria CBN) has further raised the interest rates to fight inflation. But in the long term, rates will drop as inflation is contained by the CBN.
Food inflation spiked to 37.92 percent in February from 35.41 percent in January 2024, showing clearly that food prices have been on a steady rise.
Rising from its 294th monetary policy meeting held on the 25th and 26th of March 2024 in Abuja, the CBN Governor, Dr. Olayemi Cardoso told the world that for inflation to be moderated in the near term, it’s expedient there is a further rise in the benchmark interest rate by 200 basis points to 24.75 percent from 22.75 percent. This is in addition to the 400-basis point raise in January making it a total 600-basis point raise in interest since January. The CBN adjusted the asymmetric corridor around the MPR to +100/-300 basis points.
Dr. Cardoso said the meeting “focused on the current inflationary pressures and the need to anchor inflation expectations as well as ensure sustained exchange rate stability. These considerations underscore the importance of the CBN’s commitment to the price stability mandate and the need to urgently bring inflation under control to ensure that the purchasing power of ordinary Nigerians is restored in the short to medium term.”
He said the rise in headline inflation, was driven largely by food prices because of supply shortages and the high cost of logistics and distribution.
The Committee, he said agreed that arresting food insecurity is key to containing current inflationary pressures. This falls clearly on the fiscal side. The CBN thus tasked the Federal Government with food insecurity and commended the provision of various palliatives, the release of grains from the strategic reserves, the distribution of seeds and fertilizers, as well as farm implements for dry season farming as a good response to food security.
The CBN therefore called for the full implementation of the Federal Government’s agricultural policies and programmes to improve food supply and further advised for broader fiscal consolidation, particularly on the improvements of tax collection and tax-to-GDP ratio.
The Apex Bank governor said that based on the issues, tightening was the way out, at least for now. “The MPC was faced with the option of either progressing with its tightening cycle or hold, to observe the impact of the previous rate hike and adjustment of the Cash Reserve Requirement. After reviewing the balance of risks and the near-term inflation outlook, Members were convinced of the need to progress with the tightening cycle.” He said.
The CBN further reckoned that key “drivers of inflationary pressure remain the strong exchange rate pass-through to domestic prices; rising cost of transportation; high cost of energy and other production inputs; lingering insecurity, especially in food-producing areas; and legacy infrastructure deficits.”
Commenting on the decision, Dr. David Aku, a financial analyst commended the CBN for the bold decision.
He said the decision looked tough but it agrees with the projections that a 700 to 800-basis point raise in MPC from the December 2023 levels would be the most ideal based on the current inflation position.
“The real MPR hike would have been a raise by 800 basis points in January 2024. But because that might be too aggressive, the CBN did 400 basis points in January and with the exchange rate moderating, a 200-basis point raise in February is in order. The CBN should go aggressive on inflation now before inflation develops further resistance” he said.
As to whether the CBN would continue the tightening he said that would depend on how the market reacts.
He also expressed confidence in the way the CBN has managed its core mandate thus far.
“I have a high level of confidence in the current CBN Governor and his team on the high level of transparency and meticulous application of monetary policy tools to solving economic problems, especially the fire crisis. If this continues, a lot of mess will be fixed and the CBN Governor is on the right footing” he stated.
Nick Agule, a columnist and financial analyst however feels the CBN should have lowered the interest rates to encourage production, especially in the agricultural sector as the supply of more food is critical to solving the food inflation problem.
He said “Supply deficit is a causative factor for food inflation as well. Thus, dealing with the supply deficit requires interest rates to be cut so that producers can access cheap credit to produce more. When you increase interest rates in a stagflation (low output, low employment, and high inflation), it makes the situation worse” he submitted.
According to him, the “more MPR they hike, the more inflation goes up. In the last MPC meeting on the 26/27th of February, the inflation rate was 29.9% with food inflation at 35.41%. The MPC increased the MPR from 18.75% to 22.75% to fight this inflation. But instead of lowering, the inflation called their bluff and rose to 31.7% with food inflation spiking to 37.92%. Food inflation does not respond to interest rate hikes because even if interest rates are hiked to 100%, people will not save, they must buy food to feed their families” he explained
