CBN Must Halt the MPC Rate Hikes: The real sector’s had enough

As the Central Bank of Nigeria (CBN) prepares for its next Monetary Policy Committee (MPC) meeting on January 27th, the Governor (Yemi Cardoso) and his team need to reconsider the continuous hike in the minimum rediscount rate (MRR) The current rate of 27.5% is stifling the manufacturing and productive sectors, endangering production, jobs, and growth. The hikes were justified in February 2024 when the committee had not met for 6 months prior and inflation was biting, but a continuous hike one year after by over 500 basis points is unhelpful to the larger economy from a balance scorecard perspective.

Interest rate hike is a traditional measure to combat inflation, it simply makes access to credit more expensive and ultimately reduce spendings and hopefully tame inflation. Economics however is not a precise science, and there must be a balance. The ancient Greek philosopher, Aristotle, once said, “Virtue is a mean between excess and deficiency.” AACS in its February 28th 2024 edition (bit.ly/40qSvHU) supported a hike and five months and a few sessions after cautioned it should be paused in its June 3rd 2024 edition (t.ly/ewmLO ) The rate that has grown from 22.5% in February 2024 to 27.5% by November 2024 is now over the top. The thin balance now must be between controlling inflation and pushing economic growth.

The cash reserve ratio (CRR) at the moment is 50% and the liquidity ratio is 30%, which implies that deposit money banks can only effectively lend 20% of their deposits to deficit income units and at rates in excess of 27.5% to their prime customers. Note that 90% or more of borrowers are below prime, and interest rates often hover over 40%. This is not conducive to economic growth and development, and is hurting the real sector terribly. The CBN must think outside the box and explore alternative measures to control inflation without stifling the real sector.

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AACS, strongly advises the CBN MPC to halt the hike when it meets on January 27, 2025. We believe that the current rate of 27.5% is unsustainable and fighting inflation cannot be tantamount to hurting growth.

The CBN MPC must halt the rate hikes now.