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Economy | Monetary Policy

CBN – Shooting for the Moon

Nov 24, 2022   •   by   •   Source: FDC Ltd   •   eye-icon 184 views

The popular saying "shoot for the moon; even if you miss, you'll be one of the stars." 


The monetary policy committee closed the curtains for the year with an additional 100bps increase to its anchor rate (16.5%pa). This is the fourth consecutive rate hike in six meetings. Overall, the MPC has increased rates by 500bps. 

 

Monetary policy tightening is not Nigeria-specific, it is a global phenomenon. The world has moved from the era of near-zero interest rates and quantitative easing to aggressive rate hikes not seen since the financial crisis of 2008. The US Fed has increased rates by a total of 375bps, the BoE 275bps, and the Bank of Ghana, a whooping 1000bps. Clearly, Nigeria’s position is consistent with the global trend. 

 

The reason for this is simple. Inflation is ravaging countries, and the only card left on the table for monetary policy authorities is to mop up excess liquidity by raising rates. 

In Nigeria, inflation has contributed towards pushing over 60% (133 million) of the population into multidimensional poverty. However, the silver lining is that the cumulative increase in rates (5%) is higher than that of inflation (3.4%). Meaning that inflation may begin to taper, albeit slowly in the near term. In addition, the aggressive stance of the CBN might just be the incentive to retain investors and moderate the speed of capital outflows.

 

Merry or Beary(ish) Christmas??

While raising rates are good, policymakers must remember that the Nigerian economy is still limping. The IMF has revised downwards our growth forecast to 3% from 3.4%. Most importantly, the naira is languishing and contributing to 70% of the country’s inflation woes. The parallel market rate has lost 39% this year and may fall further to N820/$ from its current value of N780/$. A structured exchange rate system together with an increase in forex supply is needed now more than ever. 

 

Christmas will be tough because of higher food, energy and flight ticket prices, but happy because things may get better as we enter the New Year. In all, it will be a beary Christmas and a sappy new year!

 

In the slides and video link below, Bismarck Rewane breaks down the implications of the recent interest rate hike on investors, businesses, and consumers as we head into the festive period and the polls in 2023.

 

Download Presentation Slides Here

 

Watch Video

 

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