The Central Bank of Nigeria’s Monetary Policy Committee has hiked benchmark interest to 13%. What CBN did is the right thing: Nigeria needs to fight inflation which was 16.8% in April. By hiking the rate, it could reduce demand, theoretically. However, it does not work that way in Nigeria, practically, as we’re never in any pricing equilibrium with demand and supply. Why? Most of our market systems are informal and inherently imperfect, making some of these tools muted.
Yet, in the formal market, the CBN call is on the money. I expect stocks to fall as capital becomes more expensive with speculators out of the way. Industrial output will likely drop since the cost of borrowing will rise and investments will be paused. (If companies cannot expand, expect employment to be affected).
I am in the school of economics that believes that the best way to manage inflation in a country like Nigeria will be increasing supply (hard in short-term). . If you do that, the price points will move, ceteris paribus. The The United States is taming demand by increasing interest rate. They have better tools to achieve that since the system is already credit-based.
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Yes, the US has tons of consumer credits which can be affected as credit card companies and banks raise interest rates. Nigeria does not have that exposure as our credit systems are largely corporate-anchored.
So, in Nigeria, when you raise interests, you are not shaping consumer purchase that much. Rather, you are influencing corporate investments and that will then negatively affect supply which you need to shift the equilibrium point to bring prices down.
(I acknowledge that CBN did try to manage this conundrum by keeping the development finance interest rate flat at 5%. But that is textbook as it is very limited to the size of the total credit in the economy.)
Of course, the apex bank has looked at these factors and decided to pursue this path. It has better data. Using rates is a short-term fix; we need to ramp up supply to provide a long-term solution to inflation in our largely imperfect market system with many informal components.
The Central Bank of Nigeria’s Monetary Policy Committee has jacked up benchmark interest to 13 per cent, 150 basis points above the previous rate.
It is the first change since September 2020 and the fist hike in six years.
The Governor of the Central Bank, Godwin Emefiele, made this known while reading the communique of the MPC’s 142nd meeting.
Mr Emefiele said the action was to tame the rising inflation rate in the country.
The CBN governor, however, said the rate on development finance loans will remain at 5 percent till 2023.
A 0.5 percentage points interest rate hike announced by the United States’ Federal Reserve earlier in the month reverberated around the globe, spurring other economies to hike rates.
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Comment 1: I quite agree with you sir. I however think this is a very wrong move that can further create more inflationary problems… Nigeria’s economy is quite peculiar and economic theories do not always go well over here. However, the intention is to understand theories and then modify to suit our economy. Inflation in Nigeria is a supply side phenomenon emanating from increased cost of production as a result of consistent currency depreciation in the parallel market, increasing energy cost, decline in agricultural productivity as a result of insecurity, the border closure which has just been reopened, and exogenous factors such as the disruption in global supply chain as a result of the pandemic and the Ukraine war which has seen wheat prices increase. These factors are independent of monetary policy. The CBN increasing interest rate might just push up the cost of production which further feeds into inflation.
At the best, there won’t be a change in the rate of inflation, but there definitely will be a decline in output which constrains employment. The move by the CBN is counterproductive. We cannot use demand pull measures to curb a cost push inflation.
Comment 2: Yes! An increase in interest rate does regulate inflation if the inflation was caused by too much money in the circulation – Money market disequilibrium. Which is a half of a whole.
The other half is in the good market; to ensure an equilibrium, the issue of scarcity must also be addressed by ensuring a parallel stand for supply and demand in this segment of the economy also. What about policies that facilitates industrialization and the likes? We don’t seem to be ready yet…
I assume that the federal government’s intention is to overlook the effect of of the latter, that of which will worsen the former in the not-so-long run.
This is like taking pain reliever for cancer: one may mitigate the pain for a while but…
My Response: “issue of scarcity must also be addressed” – that is the key factor but it is a PhD thesis in Nigeria.
Comment 3: Our economy doesn’t respond to some of these moves, because Nigeria runs a parallel economy: corporate and street, with the latter being hugely dominant, and that is the one most people relate with.
We don’t run a credit-based economy, most people that need money for business don’t go to the banks, they simply meet those who can lend at much higher rate, as long as you don’t stress the borrowers with filling of plenty paperwork.
The interest rate hike is not different from the way the CBN declares the official rate for naira against dollar, but we see what obtains in the real market, and we know that the items we purchase are never calibrated on the official rate but rather what the street sets the price to be.
To get a handle on this economy requires native intelligence and street credibility, the typical economic models they fall over themselves to acquire the degree from the other side don’t move mountains here. They will deploy all the tools in their kitty, yet the economy is dancing to a different tune; the managers still don’t know all the moving parts in the very monster they are trying to tame.
There’s a mental fatigue among the managers, they don’t really have any fresh idea to bring, just trudging to the finish line.
Comment 4: The US is a credit based economy. Credit to cash ratio will be like 10:1..Nigeria has no credit economy. Our credit system and economy has to attract Dollars,Pounds and Yuan (via exports ,remittances,factories ,production,tech etc).
Increasing the MPR is not an isolated solution.The way out of our inflation is to export more,or simply supply more Dollars to the Forex exchanges.The cost of producing goods and cost of importation is what is driving our price inflations. CBN needs to pour in more Dollars while allowing huge borrowing for people who produce food and consumer goods. We also subsidize direct public transportion for workers, goods and services.
We need to stop trying to carbon-copy what the Chairman of the US Federal Reserve does every time. The US and Nigerian economy are two completely different economies. The US has too much money ,$26T GDP for 350M people. We have 0.5T for 200M people. Our MPR is 13%.Theirs is 1%, (usually at 0%). What we need to do is strengthen our currency against the Dollar. The exact reason US interest rates was increased to 1% (as other currencies were gaining on the Dollar. Same reason oil prices haven’t gone higher to $140/ barell, despite a huge strain in global supply.)
Comment 5: Since the definition of inflation is much money chasing few goods. The antidote to inflation ought to be things that supports production, so that we would return to the equilibrium but the challenge in Nigeria are many. The CBN governor supporting the government in power through “ways and means” definitely cannot help inflation. It seems like governance is off the table and politics have taken over but really when has governance been on the table? We will keep struggling if we keep on with this constitution. We need to decentralise the things that helps factors of production. Looking up to the price of oil won’t help. A country with our population must focus on production, anything short of that would spell doom.
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Our economy doesn’t respond to some of these moves, because Nigeria runs a parallel economy: corporate and street, with the latter being hugely dominant, and that is the one most people relate with.
We don’t run a credit-based economy, most people that need money for business don’t go to the banks, they simply meet those who can lend at much higher rate, as long as you don’t stress the borrowers with filling of plenty paperwork.
The interest rate hike is not different from the way the CBN declares the official rate for naira against dollar, but we see what obtains in the real market, and we know that the items we purchase are never calibrated on the official rate but rather what the street sets the price to be.
To get a handle on this economy requires native intelligence and street credibility, the typical economic models they fall over themselves to acquire the degree from the other side don’t move mountains here. They will deploy all the tools in their kitty, yet the economy is dancing to a different tune; the managers still don’t know all the moving parts in the very monster they are trying to tame.
There’s a mental fatigue among the managers, they don’t really have any fresh idea to bring, just trudging to the finish line.