What CBN Interest Rate Rise Means For Nigerians, Economy

The Central Bank of Nigeria’s Monetary Policy Committee raised the benchmark rate to 13 percent on Tuesday. The Governor of the Central Bank, Godwin Emefielehe said the move was to tame the rising rate of inflation in the country.

Inflation in Africa’s most populous country soared to 16.8 percent in April, according to a report from the National Statistical Office (NATIONAL OFFICE OF STANDARDS). The skyrocketing rate was fueled by fuel price increases and accelerating food costs, including bread and cereal.

The CBN said on Tuesday that the global economic outlook remains uncertain amid rising commodity prices worsened by the war between Russia and Ukraine.

Earlier in the month, an interest rate hike of 0.5 percentage point announced by the US Federal Reserve reverberated around the world, prompting other economies to raise rates.

The US Federal Reserve raised its benchmark interest rate to a target rate range of between 0.75% and 1%, the biggest hike in 22 years. The decision followed a 0.25 percentage point increase in March, the first increase since December 2018.

Like the United States, other major world economies have raised their rates.

Monetary Tool

The interest rate is one of the key tools deployed by central banks around the world to manage the flow of money and productivity in their respective countries. A change in the interest rate could have an effect on the macroeconomy and other key economic indicators such as consumer spending and indebtedness.

In Nigeria, the tool allows the main bank to make changes to general monetary policies designed to facilitate the government’s planned fiscal policy.

Emefiele explained on Tuesday that at the MPC meeting, six of the 11 committee members voted in favor of raising the key rate.

The committee also voted to keep the asymmetric corridor at +100 and -700 basis points around the MPR, as well as keeping the Cash Reserve Ratio (CRR) at 27 percent.

The CBN governor argued that the sharp rise in inflation in emerging and advanced market economies has raised growing concern among central banks around the world, adding that the creeping rise in inflation driven by rising demand aggregate growth and wage growth has put sustainable pressure on prices. levels

inflationary pressure

The main driver of the CBN rate hike on Tuesday was the need to control rising inflation. As of Tuesday, Nigeria had not changed its interest rate since September 2020, when the CBN lowered the policy rate from 12.5% ​​to 11.5%.

Amid the global upswing, the nation faces an uncertain situation amid efforts to contain inflation, keep domestic prices stable and ensure economic growth.

Mr. Emefiele addressed this concern on Tuesday, thus: “On the need to tighten, MPC feels compelled that tightening would help moderate the inflationary offset of steady growth so far and improve real GDP.

“It is also felt that the adjustment would help control inflation before it takes over the galloping framework considering the increase in headline inflation month on month.”

By raising the interest rate to 13%, lending is expected to be more difficult and consumers will have less money to spend. By implication, amid lower demand among consumers, manufacturers of goods would be wary of raising prices. In effect, all of this would combine to reduce inflationary pressure.

But the hike could also fail to control inflation if other macroeconomic indicators falter.

The nightmare of the manufacturers

An interest rate hike is often seen as a manufacturers nightmare as it stifles productivity and expansion.

As the major bank raises its rates to 13%, manufacturers hoping to get loans from banks may have been squeezed out due to the higher cost of borrowing amid falling demand.

When the benchmark rate was set at 11.5 percent, banks typically charged manufacturers and other lenders between 12 percent and 30 percent of loans. With the rate hike (13%), charges could skyrocket.

Earlier in the year, the Nigerian Manufacturers Association had said that the average rate at which its members borrowed money from banks was 20.75% and 21.25% in 2020 and 2019, respectively.

“It is important that the CBN carry out a coordinated reduction of the monetary policy rate and the lending rate,” MAN said in a statement.

Employment and Productivity

A rise in the interest rate slows down productivity as manufacturers struggle to keep machinery running and pay wages. Those hoping to borrow for expansion and production would have to put such ideas aside in the face of the high cost of accessing the funds. Persistently low interest rates favor larger companies because it allows them to increase production, employ more people, and expand. When the interest rate is raised, the effect is the opposite.

In terms of job creation, an increase in the interest rate could have an effect, albeit a marginal one, on the number of jobs created or lost.

The unemployment rate in Nigeria averaged 13.55 percent from 2006 to 2020, reaching an all-time high of 33.30 percent in the fourth quarter of 2020. Even if the impact may not be significant in the immediate term, the increase in the interest rate and the consequent drop in productivity could put several people out of work.

Stocks, Bonds and Forex

By default, low interest rates can cause the stock market to rise, just as the market depreciates when the central bank raises interest rates.

By implication, the change in central bank interest rates affects the prices of various assets, such as bonds, stocks, and houses.

ALSO READ: Nigerian central bank raises interest rate from 11.5% to 13%

In the case of Nigeria, the 13% increase in central bank interest rates may negatively affect the prices of these assets, decrease household wealth and weaken people’s appetite to borrow and spend.

The exchange rate can also be affected by rising rates, because an increase in a nation’s interest rate relative to other countries makes assets denominated in domestic currency more attractive to domestic and foreign investors. This can lead to an increase in demand for the national country’s currency relative to other foreign currencies.

Meanwhile, as the national currency strengthens, imported goods will become cheaper, while locally produced products will become more expensive on the foreign market. This could also affect demand and lead to a reduction in foreign exchange earnings with a possible impact on the balance of payments.

In the case of Tuesday’s rise in Nigeria’s interest rates, it remains uncertain how much this will affect the nation’s currencies in light of the widespread rise in rates in different economies around the world.

At press time on Wednesday, numerous central banks around the world have raised their rates following the US rate hike earlier in the month. Like the major US bank, the Bank of England raised interest rates from 0.75% to 1% to tackle skyrocketing inflation that is expected to exceed 10% in the coming months. The bank also warned that the cost-of-living crisis could plunge the economy into a recession in 2022.

Similarly, the central bank of Australia and the Reserve Bank of India (RBI) raised their rates to accommodate the changing dynamics.