As the inflation rate continues to trend downwards in Nigeria, the Central Bank of Nigeria has remained cautious about lowering the benchmark lending rate as it believes the threat of inflation is still high in the economy, especially with government spending expected to increase in 2014 to 2015 due and upcoming elections
The Monetary Policy Committee of the Central Bank of Nigeria, in its last 10 MPC meetings, has left the benchmark lending rate untouched despite continuous drop in inflation rate. For the second consecutive time, only three members out of the 11 members of the MPC, which is headed by the CBN Governor, Mr. Lamido Sanusi, have voted for a rate cut of 50 basis points.
The committee at its last meeting in May stated that government spending would constitute a major risk to the inflation and exchange rate outlook, thus advising prudence in monetary policy action.
Sanusi, in his personal statement at the meeting, said, “I am of the view that in terms of what we set out to achieve, monetary policy has thus far been extremely successful. Principal risks to inflation on a forward looking basis lie in increased government spending and a weaker currency due to oil revenue shocks. Easing money at this point will add impetus to these inflationary impulses. Indeed, we need to monitor these two risks and be courageous enough to tighten money if they materialise and threaten to undermine stability.”
The National Bureau of Statistics on Sunday released the Consumer Price Index for the month of May, saying the country’s inflation rate now stood at nine per cent.
CPI is a measure of changes in the purchasing power of a currency and the rate of inflation. The consumer price index expresses the current prices of a basket of goods and services in terms of the prices during the same period in a previous year, to show the effect of inflation on purchasing power.
The NBS, in the report signed by the Statistician-General of the Federation, Dr. Yemi Kale, said the nine per cent CPI for the month of May represented a slight decrease over the 9.1 per cent recorded in the preceding month. The NBS report stated that year-on-year, the rates continued to hold below single digits, adding that the core sub-index continued to show a muted rise due to base effects.
It said, “The CPI, which measures inflation, rose to nine per cent year-on-year in May, slightly below the 9.1 per cent rate recorded in April. The increase in food prices captured by the Food Sub-index, while significant, is also lower year-on-year. Through the first five months of 2013, the Food Sub-index has averaged 10.0 per cent, 1.8 per cent lower than rates recorded over the same period last year.”
The average inflation rate for 2013 is forecast to remain at single digit. The World Bank, in its inflation forecast, foresees Nigeria’s inflation rate easing to single digit this year.
Analysts at First Security Discount House, in a report on the year 2013, forecast that average inflation rate would be 8.5 per cent. However, the monetary authority said it would not loosen its monetary policy stance.
The Lagos Chamber of Commerce and Industry recently described as ill-advised and insensitive, the retention of the MPR at 12 per cent by the MPC.
The statement by LCCI read, “The continuation of a tight monetary regime will have the following outcomes – persistence of high interest rate, deepening of the unemployment crisis, financial intermediation role of the banks will continue to be undermined, recovery of the real economy will remain sluggish, capacity of enterprises to create jobs will continue to be inhibited, stock market recovery will continue to be slow and the capacity of banks to support the economy will remain severely constrained.”
Some analysts are of the view that the CBN’s lending rate of 12 per cent to commercial banks instigated the current borrowing cost of 20 to 28 per cent to the real sector.
According to them, the MPR is the rate at which banks borrow from the CBN to cover their immediate cash shortfalls from time to time; thus, the higher the cost of such borrowing, the higher also will be the rate at which banks advance credit to the real sector.
They added that such high cost of borrowing increased production cost and made indigenous products uncompetitive against imported substitutes, which were generally aggressively supported with conversely lower single digit interest rates in export economies.
Speaking at a media parley recently on the negative impact of the development on micro-businesses, the President, Association of Micro-Entrepreneurs of Nigeria, Mr. Saviour Iche, said the CBN’s benchmark lending rate had been “highly unfavourable and destructive to indigenous businesses as some deposit money banks charged as high as 19 to 25 per cent interest rates on loans given to MSMEs.”
He added that the tough access to credit facilities did not create room for MSME to grow in Nigeria and this was seriously affecting Nigerian industrial development negatively.
The Manufacturers’ Association of Nigeria had also decried the high cost of doing business in the country. At its recent 45th Annual General Meeting, the Chairman, MAN, Ikeja Branch, Mr. Isaac Agoye, called on the government to reduce inflation and interest rates by formulating good monetary policies.
Also, analysts believe that it is high time the CBN started loosening its tight monetary policy.
The Chief Executive Officer, Fatrax Securities Limited, Dr Wale Ositelu, said the CBN should consider reducing interest rates to stimulate medium-to-long-term economic growth.
“One will expect the CBN to reduce its benchmark lending rate at the next MPC meeting. If the CBN maintains the current monetary stance, the possible impacts of these measures in the money market and on the fixed income securities will be negative,” he said.
Speaking in the same vein, the Managing Director, Sotice Investment Company Limited, Mr. Adedayo Toluwase, said the reduction in money supply through an increase in the banks’ Cash Reserve Ratio without an attendant reduction in the benchmark interest rate had an adverse effect on economic activities.
He said, “The reality of the current economic and business conditions is a cause for concern, there is escalating unemployment crisis; profit margins are declining; consumer demand is weak; prohibitive interest rates; decelerating economic growth and high mortality rate of small businesses. Hence, the CBN should make a quick reversal of its monetary policies.”
Notwithstanding the forecast, the CBN has said it will not bow to pressure to reduce the benchmark lending rate at the expense of economic stability.
In fact, Sanusi, at the fourth annual investors’ forum organised by Renaissance Capital, said the bank was not in a hurry to loosen its stance on monetary policy, citing the need to ensure economic stability.
He explained that the banking sector watchdog did not want to send a signal that the restrictive monetary policy regime was over by lowering interest rate.
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