CBN Interest Rate Hikes Will Not Control Inflation – World Bank

The World Bank has expressed concerns regarding the effectiveness of the Central Bank of Nigeria’s monetary policy tightening in addressing the persistent inflation in the country.

This warning was included in the global economic prospects report recently published by the World Bank. The report highlighted the potential risk to Nigeria’s economic growth if the tightening policies fail to curb inflation.

The increase in the monetary policy rate (MPR) aims to control inflation by raising interest rates. However, experts caution that high interest rates may hinder borrowing for manufacturers and contractors, leading to reduced productivity and job losses.

Since the beginning of the year, the Monetary Policy Committee (MPC) has raised interest rates from 22.75 per cent in February to 26.25 per cent in May, marking a significant increase of 750 basis points.

Recently, the World Bank published a report stating that the “Risks to Nigeria’s growth outlook are substantial, including the possibility that the tightening of monetary policy stops short of reining in inflation.”

The report also predicted Nigeria’s economic growth rate outlook for the rest of 2024 and 2025 to remain the same.

“Growth in Nigeria is projected to pick up to 3.3 per cent this year and 3.5 per cent in 2025.

“After the macroeconomic reforms’ initial shock, economic conditions are expected to gradually improve, resulting in sustained, but still-modest growth in the non-oil economy.

“In addition, the oil sector is expected to stabilise as production somewhat recovers”, the World Bank said stressed.

During the 151st MPC Meeting held on March 25 – 26, 2024, the Deputy Governor of the Financial System Stability Directorate at CBN, Philip Ikeazor, expressed his viewpoint regarding the negative impact of consecutive aggressive interest rate tightening on the economy.

He emphasized that the oil and manufacturing sectors, which have shown poor growth contribution and susceptibility to rate hikes, would be further depressed by such measures. This statement was made in his capacity as an MPC member.

Ikeazor said: “The pressure point is already manifesting, as indicated in the projected contraction of PMI in the industrial sector by 7.1 index points occasioned by rising input cost and low-capacity utilisation.”

In his remarks, a distinguished fellow and the head of the Africa Growth Initiative within the Global Economy and Development Programme at Brookings, Aloysius Uche Ordu, highlighted that increasing interest rates affect both consumer purchases and business investments, as shown by the composite purchasing managers’ index in February 2024.

He contended that significant advancements in tackling supply-chain challenges and other factors driving up costs are essential to reduce the likelihood of inflation persisting at high levels, noting that such a scenario would complicate life for Nigerians and impair the economy’s operation.

“To allow higher inflation to become entrenched in people’s expectations would make it much more expensive to reduce later through even higher interest rates, larger output losses and higher unemployment,” Daily Trust quoted Ordu saying.

The concerns of Ikeazor were further highlighted by CBN Governor and Chairman of the MPC, Olayemi Cardoso, in his personal statement when he argued that, “If such a hyperinflationary scenario is to become reality, available options to control inflation could be severely constrained.”

Cardoso noted that the facts presented to the MPC clearly indicate that the monetary factors contributing to inflation are diminishing in significance.

Reaction To World Bank Report

However, Professor of Finance and Capital Market, Uche Uwaleke, has reacted to the World Bank report, saying: “I have been saying it: aggressive rate hike is inappropriate in situations where inflation drivers are largely due to supply-side factors and structural bottlenecks.

“In the case of Nigeria, the pressure point is on food, with the food index accounting for over 50 per cent of headline inflation.

“To deal with the elevated food inflation, the fiscal authority has more roles to play, especially with respect to addressing insecurity, transport challenges and climate change. These factors are exogenous to the CBN.”

He mentioned that the Central Bank of Nigeria needs to understand that the economic difficulties the country is currently experiencing are not solely due to inflation, but also include stagflation. Therefore, in future MPC meetings, it should also consider future growth issues.

On his part, the Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, said: “My view is that we need to be careful about it. We can’t dismiss it entirely because the Central Bank has a role to play in managing inflation.

“Real sector investors are grappling with high costs of diesel, logistics, transportation, and all manner of taxation problems, regulatory issues, and exchange rate depreciation.

“On top of that, you now have this additional problem of increasing the cost of funds; it can be a suffocating situation for businesses. So, that is why the CBN also needs to define the limits of rate hikes. Fighting inflation is the collective responsibility of the monetary and fiscal authorities.

“I’m not saying that the CBN should completely be aloof, but it should not also go to the extreme of making life extremely difficult for operators in the economy.

“Right now, with the latest tightening, the prime lending rate will be 27–28 per cent. That’s the rate for prime customers with high credit ratings. So, you can now imagine the rate at which SMEs will be paying for funds — you are talking about between 30-35 per cent.

“So, if you have that kind of situation, what business can you do in this economy to give you a return of 30 per cent, even a return of 25 per cent? What business? I can’t think of any.”