High inflation: CBN raises banks’ lending rate to 14% •Experts expect more forex inflow

Central Bank of Nigeria (CBN) on Tuesday raised its monetary policy rate to curb inflation that has crossed 16 percent for the first time in over 10 years.

However, this was a tough decision for the eight members of the Monetary Policy Committee (MPC) that attended the July meeting as they were divided between curbing rising inflation and reflating an economy that finally went into recession after two consecutive quarters of negative growth.

In fact, the last time that Nigeria had this kind of negative growth was in 1968 during the civil was.

Voting eight to three, MPC increased the key lending rate to 14 percent from 12 percent according to CBN Governor Godwin Emefiele while briefing reporters at the end of the 108th meeting of the committee, which started on Monday.

“The Committee noted that inflation had risen significantly, eroding real purchasing power of fixed income earners and dragging growth,” Emefiele said. “The MPC was further concerned that while the situation called for obvious tightening of the monetary policy stance, the technical recession confronting the economy and the prospects of negative growth to year-end needed to be factored into the policy parameters.”

The MPC “noted that the negative real interest rates did not support the recent flexible foreign-exchange market as foreign investors’ attitude had remained lukewarm, showing unwillingness in bringing in new capital,” Emefiele said. An increase in borrowing costs “gives impetus for improving the liquidity of the foreign-exchange market,” he said.

According to Emefiele who read the communique of the meeting, MPC recognized “that the Bank lacked the instruments required to directly jumpstart growth, and being mindful not to calibrate its instruments in such a manner as to undermine its primary mandate and financial system stability, in assessment of the relevant issues, was of the view that the balance of risks remains tilted against price stability. “Consequently, five (5) members voted to raise the Monetary Policy Rate (MPR) while three (3) voted to hold.

Meanwhile, Managing Director and Chief Economist, Africa Global Research Standard Chartered Bank, Razia Khan in an emailed note to Nigerian Tribune, says though this was the right thing for the committee to have done, given the pledge to restore positive real interest rates gradually, she expect another 200 bps hike in the policy rate to 16 per cent at the September MPC meeting.

According to Khan, establishing more credible policy and attracting greater inflows is about as pro-growth as policy can be, given the challenges currently facing the Nigerian economy.

In all, Khan stated, this was a good outcome to the MPC meeting, adding that as Nigeria embarks upon the path of reform (FX liberalisation, fuel price deregulation, transparency initiatives, efforts to boost revenue mobilisation, power sector reforms), all with a view to easing the economy’s transition to lower oil prices, and creating the foundation for more sound long-term growth, she thinks that yesterday’s MPC decision represented an important initial step in the right direction.

Also, analysts at an international equity firm, Renaissance Capital, said though they had predicted a bold 3-ppt hike in the policy interest rate, to 15 per cent in order to counter accelerating inflation and naira weakness, the hike will only add to consumer woes.

“This will only add to consumer woes, in our view. When the lending rate is increasing (decreasing), consumer confidence falls (improves). This is what the negative correlation between the two variables tells us. This may surprise those that know Nigerian households to be underleveraged, in part due to low credit penetration, compared with, say, Kenya. We think the relationship between the lending rate and consumer confidence may be partly due to distributors of consumer goods passing on higher interest rates on working capital loans to consumers,” analysts at Rencap concluded.

According to the investment banking and equity firm, the Nigerian consumer will come under further strain in second half (2H16) 2016 as the naira weakens, petrol prices rise and interest rates increase.

A recovery in oil output would help lift consumption, but not in the near term as “we think the government’s talks with the Niger Delta militants are likely to be protracted,” Rencap stated.

For experts at Afrinvest (West) Africa Limited, raising interest rate and keeping other rates constant will attract portfolio capital inflows which is yet to respond to currency market flexibility. The analysts believe that the CBN and Debt Management Office (DMO) have guided towards this by aggressively mopping up liquidity at high rates last week.