Inflation increases despite CBN’s interest rate raise

On Tuesday, July 25, 2023, the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) raised the interest rate from 18.50% to 18.75%.

The decision to increase the Monetary Policy Rate (MPR) was reached and announced by the Acting CBN Governor, Folashodun Shonubi.

Mr Shonubi disclosed that the major reason for hiking the interest rate was to offset/reduce the moderate increase in headline inflation.

Thus, essentially, the interest rate was increased to control Nigeria’s ever galloping inflation which reached 22.79% in June, according to the data from the National Bureau of Statistics (NBS).

It is important to state that the decision of the MPC on July 25 was the first since Bola Tinubu assumed office as Nigeria’s President. Also, it was the first decision reached by the committee in about a decade without Godwin Emefiele, who was suspended on June 8 as the CBN Governor by President Tinubu.

Now, back to the main issue, what exactly is Monetary Policy Rate (MPR), and what does it mean for businesses and the economy?

First, the MPR is one of the many monetary tools used by Central Banks in different countries to manage the flow of money and productivity in their respective countries.

It simply refers to the rate at which the CBN lends money to commercial banks or other financial institutions. 

Put differently, it is the percentage of that extra money one gets back for lending you money, in this case, the CBN.

For instance, if the CBN borrows Bank Dee N1,000 at an 18.75% interest rate for a period of one year, it means that when Bank Dee is giving CBN back the money, there will be an extra N187.50, which will then make CBN total money N1,187.50.

READ ALSO: CBN loses control of Inflation: What else works?

This is similar to when individuals or cooperatives borrow their friends’ or members’ money. In most cases, there is usually little interest attached to the money. So, we are guessing this concept is not new to you.

We suspect you might want to ask, so why does it make headlines when the CBN raises interest rates, right? Well, follow us.

First, the decisions made by the apex bank in any country have both small and large-scale implications. 

Thus, the interest rate set by the CBN is very important and of concern to many people and businesses because it influences other interest rates in the economy and also has other macroeconomic implications, such as regulating economic activities and controlling inflation.

The CBN increases or reduces the interest/policy rates for various reasons. This, of course, has an impact on the economy. 

For instance, when the economy is growing too fast, the government (CBN in this case) might decide to increase interest rates to slow down spending and tame inflation. Also, when the economy is slow, they might lower interest rates to encourage more borrowing and spending to boost growth.

One of the reasons for this current hike in the interest rate, as explained by the Acting CBN Governor, is essentially to reduce inflation.

Inflation is the general increase in prices of goods and services over time. When inflation happens, the cost of things we buy goes up, and as a result, our money’s purchasing power decreases. Inflation is a normal part of the economy, but too much inflation can cause problems for people and businesses. Thus Central Banks and governments usually try to control inflation to keep the economy stable, and one of the ways to do that is through monetary policies such as hiking interest rates.

The idea usually is that with an increase in interest rate (now pegged at 18.75%), borrowing money would become a bit hard. That is, the interest rate will sort of discourage people from borrowing and having a lot of money. Thus, making consumers have less money to spend. 

The implication of this is that with less money on consumers, demand will also be low, and manufacturers of goods would be skeptical of raising prices. In effect, all of these would combine to reduce inflationary pressure.

Although the CBN has deployed this monetary tool (hiking interest rates) at various times since 2022, it could not be said that it has potentially curbed the inflation rate because inflation has continued to increase in the same period under review.

This has led to various thoughts from different experts. For instance, Kalu Aja, a financial analyst, noted that monetary policy alone cannot solve the increasing inflation rate being experienced by the country because the current inflation is supply driven. Flowing from his stance, he suggested that in the short term, the government should allow the import of food to help curb the issue of current high prices. While in the long run, efforts should be made to fix security and infrastructure issues. 

Tope Fasua, on this end, has reservations about the MPR as a strategy for curbing inflation. In his article titled “What Nigeria can really do to tame inflation,” he noted that the CBN’s approach of increasing monetary interest rates has been suboptimal in addressing the issue of inflation. In fact, he described this as an orthodox approach to fixing the problem of inflation.

He argued what the increase in interest rates has done so far is make manufacturers and borrowers just pay more for funds and, in the end, still pass the higher costs to consumers. Thus, defeating its intended purpose — curbing inflation.

In light of this, Fasua advised that the CBN needs to consider the peculiarity of the Nigerian economy and its circumstances in making its policies, such as the one concerning taming the current inflation.