Why we increased interest rate- Emefiele
…Rate hike moderating inflation, says CBN
The Central Bank of Nigeria (CBN) has justified why it hiked interest rate to 18.5%.
In arriving at this decision, the CBN Governor, Godwin Emefiele gave an insight into the thinking that went into deciding to increase the Monetary Policy Rate (MPR) once again.
The apex bank has consistently jerked up interest rates every two months since May, 2022.
Explaining why the CBN hiked the rate to 18.5%, Emefiele stated that with regards to “the option of a hold policy, the Committee reiterated the empirical counterfactual evidence of a ‘do-nothing’ and believed that the rate hikes have indeed helped moderate the continued rise in inflation, albeit, month-on-month.
“In addition, the evidence revealed that the policy rate hikes have also moderated growth in new credit and reduced the pent-up aggregate demand contributing to the inflationary pressures.
Members he said “were unanimous in their conclusion, that the current policy stance is indeed impacting the targeted parameters and yielding the expected outcome, although slowly.
In other words, the sustained interest rate hike has successfully reined in inflation to stop it from galloping away, even though at a slow pace.
“Reviewing the argument to further hike the policy rate in a bid to subdue aggregate demand, MPC members noted that the current uptrend in inflationary pressure was driven by a combination of both demand and supply.
“The MPC observed the continued upward risk to price development driven primarily by expectations of rising energy and food prices; unabating security challenges in food producing areas; as well as persisting exchange rate pressure” Emefiele explained.
The Committee he added also felt that “it was expedient to continue to address the demand-side issues falling within the ambit of its policy tools. The balance of the argument thus leaned sufficiently in favour of a further hike (albeit less aggressively), considering the adverse impact of rising inflation on real income.
As a result of all these factors, the MPC Emefiele said “therefore opted to tighten, though moderately, so as to: indicate the MPC’s conviction that the current policy stance is moderating the rising inflation, albeit month-on-month, and sustaining the stance would consolidate the gains made so far.
Other reasons for increasing the rate he said are: to support the efforts toward moderating the demand-pull inflation, as cost of funds increases, and discourages further build-up in aggregate demand, in the face of declining output growth; narrow the negative real interest rate gap and moderate the associated consequences, including discouraging domestic savings mobilization and waning investors confidence; effectively moderate the monetary phenomenon in the current drivers of inflation by tapering both economic and financial conditions and sweep-up excess liquidity in the system; and to boost the CBN and the MPC’s credibility following its earlier forward guidance to continue to tighten when confronted with unabated rising inflation.
Based on these reasons, the members, resolved to raise the Monetary Policy Rate (MPR), moderately by 50 basis points and still retain other parameters.
The MPC then voted to: raise the MPR to 18.5 percent from 18.0 percent; retain the Asymmetric Corridor of +100/-700 basis points around the MPR; retain the CRR at 32.5 percent; and retain the Liquidity Ratio at 30 percent.
Emefiele was however worried that “despite the tight monetary policy stance adopted since its May 2022 meeting, inflation had not decelerated towards the CBN’s long run objective”.
He said the continued rise in headline inflation, albeit moderately was giving the CBN a headache because of its threat to macroeconomic stability in Nigeria.
In his words, “headline inflation in the view of MPC members remained high due largely to a host of non-monetary issues outside the reach of the central bank such as the perennial scarcity of Premium Motor Spirit (PMS) and expectations of short-term hikes in the pump price of PMS; high and rising price of various energy sources; and a host of headwinds confronting the food supply chain.
The MPC and by extension the CBN appealed to the fiscal authority “to explore other avenues to expand the fiscal safety net in an urgent bid to improve its ability to respond to legacy and emerging shocks.
“Non-oil revenue sources, such as the expansion of the tax bracket, will enable the reduction of fiscal deficit and public debt to improve fiscal space” Emefiele argued.
Emefiele also disclosed that the MPC engaged the Research and Monetary Policy Departments of the CBN “to evaluate the counterfactual evidence from available data, using empirical analysis” to find out why inflation has remained on the rise.
“The results revealed that following each monetary policy rate hike, the rise in inflation moderated relative to what it could have been, if the MPC had not aggressively raised rates at all” Emefiele said inflation would have risen to 30.48 percent but for the interest rate hikes of the CBN.
According to Emefiele, “the empirical evidence provided showed that whereas inflation in April 2023 stood at 22.22 percent, the counterfactual evidence suggests that, it could have risen to 30.48 percent in April 2023, had the MPC not taken any action to raise policy rates as it did since May last year. Indeed, the cumulative effect of MPC’s policy rate hikes moderated the rise in inflation by about 800 basis points since last year”.
Members of the MPC were also worried that “output growth, on a year-on-year basis dropped to 2.31 percent during the first quarter of 2023 compared with 3.11 percent during the first quarter of 2022.