There have been criticisms from business experts over the decision of the Central Bank of Nigeria (CBN) to jerk up its Monetary Policy Rate (MPR) to 14 per cent.
Many of the experts have predicted that the hike will lead to increased corporate failures, unemployment and decline in the nation’s stock market.
Business247 News Online recalls that at the end of its Monetary Policy Committee (MPC) meeting last week, the CBN raised the MPR from 12 percent to 14 per cent, while retaining the asymmetric window at +200 and -500 basis points around the rate.
The apex bank also retained the Cash Reserve Ratio (CRR) and the Liquidity Ratio at 22.50 per cent and 30.00 per cent, respectively.
Mr. Bismarck Rewane, Managing Director/Chief Executive, Financial Derivatives Limited stated that the MPR hike, “Is a formalization of what is happening in the money market, where treasury bills rate are already higher than 14 per cent hence it would not have effect on interest rate in the market.
“But it will increase cost of borrowing especially for small and medium enterprise (SMEs), increase default on debt, corporate failures and hence increase unemployment. It will also increase cost of borrowing for state governments. It will increase appetite for regulatory borrowing, because banks would now prefer to buy treasury bills and bonds which now offers higher rate”.
However, according to the Managing Director, APT Securities and Funds, Mr. Garba Kurfi, “It will make the naira to strengthen
“The upward increase in interest rate by the CBN is not in the best at the moment if government is serious in encouraging local production. This is because high interest rate will make the cost of production higher if producers are to get loan at higher rate from the financial institutions.
He also said that the high interest rate will discourage investments in the capital market if one can get 14 per cent risk free from the money market. This move apparently is likely to promote money market but with the inflation rate at 16.5 per cent may encourage”.
Also commenting, Head, Investment Research, Cowry Asset Management Limited, Mr. Edgar Ebinum said, “The reason for the hike is obvious but it is challenging for capital market, and it would stifle borrowing. While it is necessary to ensure a positive real return, by making the interest rate higher than inflation, but investors look beyond interest rate, the conditions in the economy is still not attractive to foreign investors The decision will cause the real sector to slow down, because there would be reduction in lending to the sector. In fact the hike makes lending more difficult for banks. The banks are already battling against rising non-performing loans and hence have reduced lending activities”.
Speaking in the same vein, Managing Director, High Cap Securities Limited, Mr. David Adonri said, “The increase in MPR to nearly match inflation rate is expected response from the monetary authority. It will crowd out credit from real sector and depress equities market. The manufacturers would be affected as credit would be on the rise. Response of fiscal authority should be to reduce domestic borrowing and move towards fiscal consolidation”
On his part, Mr. Kunle Ezun, a research analysts with Econbank Plc noted, “The decision was expected and the expectation has been factored into transactions in the money market. Remember that TBs were been sold at 14 per cent last week. That is why the market is calm.
“I also believe that the 200 basis point raise is sufficient to address the rising inflation level now. The reality is that inflation level is more of consideration to foreign investors and they are not in the market now. The local guys don’t really bother about inflation.” The hike in MPR was however commended by Managing Director, Chief Economist, Africa, Standard Chartered Bank, Mrs Razia Khan. She said.
“The decision to raise the monetary policy rate despite growth concerns will give investors a clear signal on the authorities’ intent to sustain FX reforms. This should be well-received. Given the cost-push nature of inflation in Nigeria, which largely stems from the shortage of FX, we believe that this was the right thing to have done. Today’s monetary policy decision demonstrates a commitment to FX liberalization, which alone will undo some of the bottlenecks that have contributed to inflation.
“As Nigeria embarks upon the path of reform (FX liberalisation, fuel price deregulation, transparency initiatives, efforts to boost revenue mobilisation, power sector reforms), all with a view to easing the economy’s transition to lower oil prices, and creating the foundation for more sound long-term growth, we think that today’s MPC decision represented an important initial step in the right direction.
Chief Executive Officer, SOFUNIX Investment and Communications Ltd and Chartered Stockbroker Mr. Sola Oni, said The Central Bank of Nigeria (CBN) has pushed up the Monetary Policy Rate (MPR) from 12 per cent to 14 per cent on the basis that the existing nominal anchor is a disincentive to investment for both foreign and indigenous investors, particularly, when compared to the current inflation rate. “In portfolio management, the logical assumption is that relationship between interest rate and stock market is inverse.
“This implies that when interest rate is low, speculators move their funds from the money market instruments’ to the stock market to make a kill. As a corollary, the same speculators move from the stock market to other asset classes, especially, fixed income securities when the interest rate is high.
“By this logic, one can assume that the current increase in the MPR would boost investment in the fixed income securities while it may depress investors’ appetite for equity investment. But the fact remains that it is not always so as economists would say ceteris paribus which means all things being equal. There are many exogenous factors that affect investment decision at the level of investment objective. As for the economy, the stock market mirrors the economy. Therefore, it is not cast in iron to just conclude that the CBN’s increase of the MPC to a 10 -year high will have negative impact on the stock market.”
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