What Hope For Businesses As CBN Hikes Interest Rate From 24.75% To 26.25%?

In a decisive move to combat the persistent inflation plaguing the nation, the Central Bank of Nigeria (CBN) has announced a significant increase in interest rate. The Monetary Policy Committee (MPC) has raised the benchmark interest rate by 150 basis points, from 24.75% to an unprecedented 26.25%. This bold step, the third consecutive hike in 2024, underscores the CBN's commitment to stabilizing the economy and curbing inflationary pressures.

In as much as the hiked interest rate is in its all ramifications detrimental, and contradicts the reason behind the facilitation of ease of doing business, one can contextually acknowledge the fact that inflation has been a thorn in the flesh of Nigeria's economic growth as it continues to erode the purchasing power of consumers and creating a challenging environment for business operations.

The reason for the foregoing view cannot be farfetched as following a two-day meeting, the apex bank’s MPC agreed to increase the Monetary Policy Rate(MPR) for the third straight time to rein in the country’s soaring inflation levels pegged at 33.69% in April 2024.

It will be recalled in this context that the MPC held its 295th meeting on the 20th and 21st of May 2024 to review recent economic and financial developments and assess risks to the outlook under the chairmanship of the CBN Governor, Yemi Cardoso.

However, despite the glitterati that trailed the meeting, it is advisable for members of the MPC to be cognizant of the fact that the implications of this policy shift are dire and multifaceted. On the one hand, higher interest rates are expected to dampen inflation by discouraging excessive borrowing and spending. On the other hand, the increase could potentially slow down economic growth by making loans more expensive for businesses and consumers.

Experts warn that the hike in interest rates may have adverse consequences on the stock market due to the inverse relationship between interest rates and equities market returns. This is as investors might rebalance their portfolios in favor of fixed-income securities, which could lead to a downturn in stock market performance.

While the CBN's decision is aimed at taming inflation, some experts argue that the aggressive policy rate hike could stifle production due to the high cost of funds. There is also skepticism about the effectiveness of relying solely on the monetary policy rate to combat inflation, given the significant non-monetary factors driving inflation in Nigeria, such as high energy and transport costs, as well as insecurity in food-producing regions.

Experts are agreed with the view that as Nigeria navigates through these economic adjustments that the impact of the CBN's decision could harm businesses, even as they added that the bold move will pave the way for a more stable and prosperous economic future for all Nigerians.

Agreeing with the public opinion that the present state of Nigeria’s economy deserves to be tackled; irrespective of how excruciating the policies executed to achieve the objective may be, it is worth the while as the CBN chief admitted the rising inflation levels in the country, and said that the key focus of the MPC meeting was to achieve price stability by using tools available to rein in inflation.

He said the inflation pressure is being driven largely by food inflation, citing rising costs of transportation, infrastructure challenges, insecurity, and exchange rate issues as some of the factors affecting it.

In fact, the announcement of the interest hike to its detrimental rate comes amid soaring prices of commodities and a rising cost of living.

Pushed majorly by the removal of fuel subsidy last year and the floating of the naira, Nigerians are battling historic high inflation levels. Despite protests and pressures from labour unions, President Bola Tinubu has repeatedly called for patience, expressing optimism that his government’s reforms will yield fruit.

Ostensibly acknowledging the economic situation in the country, by virtue of being the Chairman, Senate Committee on Banking, Insurance and other Financial Institutions, Senator Mukhail Adetokunbo Abiru, in his goodwill message to the Chartered Institute of Bankers of Nigeria (CIBN) during the investiture of its new President/Chairman of Council, Prof. Pius Deji Olanrewaju, held on May 17, 2024, said the economy is going through challenging times.

He said, “Your excellences, distinguished ladies and gentlemen, we are all aware that the Nigerian economy is going through challenging times. Inflation rate has remained stubborn and elevated at 33.2% as of March 2024 while real GDP growth in 2023 dropped to 2.7% down from 3.5% in 2022. Rising inflation, naira depreciation and exchange volatility have continue to roil the economic landscape due, in part, to huge outstanding Ways and Means Data from the CBN which shows that broad money supply grew year-to-date by 20.57% to N95,557.26 billion in February 2024, compared with N79,25246 billion in December 2023.”

He noted in the goodwill message that the economy is still grappling with the short-run effects of some bold reforms embarked on by the present administration; namely the removal of fuel subsidy and the unification of exchange rates which are all meant to reposition the economy for sustainable growth and development. He added that the good news is that the government is working to ensure that the adverse effects of these measures are not unduly prolonged. He also noted that the new minimum wage is expected to be announced soon, and that the consumer credit scheme is ongoing. Similar to the foregoing as he noted in his goodwill message are the student loan scheme, various MSMEs interventions, and the renewed hope infrastructure fund among some others which are all geared towards this end.

Ostensibly applauding and justifying CBN’s battle against inflation through Monetary Policy Rate (MPR), he said, “The CBN has adopted an aggressive monetary policy stance in order to tame rising inflation. This has seen the MPR jump to 24.75% and CRR to 45% over a short period of time. The loan to deposit ratio has also been reduced from 65% to 50%. All these tightening measures have been done to curtail credit growth and moderate aggregate demand. But they also have implications for asset quality of bands and prudential ratios of the banking sector. I am happy to note that, against all odds, the Nigerian banking system, judging from their financial soundness indicators, remain safe, sound and stable.”

In spite of the beauty been attributed to the new interest rate hike by the CBN, not a few experts are of the view that the hike poses several challenges to the ease of doing business. They were unanimous in their views that the CBN's decision to increase the benchmark interest rate to 26.25% from 24.75% is primarily aimed at combating inflation, saying that the increase could have several implications.

Thus, one of its implications is that of the cost of borrowing as they concurred that the higher interest rate will make loans more expensive, which could deter businesses from taking out loans for expansion or operations, and potentially slowing down economic growth.

Regarding investment rebalancing, they were of the view that investors might shift their portfolios towards fixed-income securities due to higher returns, which could result in a downturn in the stock market performance.

In a similar vein, they opined that the increased cost of funds could stifle production as businesses face higher expenses to finance their operations.

In addition to the foregoing is the view that borders on financial intermediation as they say that with the Cash Reserve Ratio (CRR) retained at 45% that the liquidity effects on the financial system could dampen financial intermediation, affecting the primary role of banks in the economy.

Regarding it implication on monetary policy effectiveness, they argued that the effectiveness of monetary policy could be limited due to weak transmission channels and the level of financial inclusion in the economy.

Experts like Uche Uwaleke, a professor of finance and capital market, and Muda Yusuf, the CEO of the Centre for the Promotion of Private Enterprise, have expressed concerns about the aggressive rate hikes. They argued that such measures have hurt output and real sector investments, with many businesses yet to recover from previous hikes. They also point out that non-monetary factors driving inflation, such as high energy and transport costs, as well as insecurity in food-belt regions, are not addressed by the interest rate hikes.

In summary, while the CBN's interest rate hike aims to curb inflation, it poses significant risks to the ease of doing business by increasing the cost of borrowing, affecting stock market investments, and potentially slowing down economic activity. Experts suggest a more balanced approach that addresses both monetary and non-monetary factors influencing inflation. Given the foregoing, it is expedient to ask at this conclusive juncture, “What hope for businesses as CBN hikes interest rate from 24.75% to 26.25%?