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Martins Azuwike

In a move to combat the country’s soaring inflation, Nigeria’s Central Bank (CBN) has increased the nominal risk-free rate by 400bps. The Monetary Policy Committee after its 2-day meeting decided to increase the Monetary Policy Rate (MPR) to 22.75% from 18.75%. 
Experts at Comercio Partners say the MPC, which has kept the MPR at 18.75% since July 2023 continues to maintain its hawkish stance, refusing to put an ease to the money circulating the Nigerian economy. “The CBN, just like most apex banks in the developed economies has continued on their contractionary monetary policies to combat the global inflation which erupted earlier in 2022 as a result of the war between Russia and Ukraine, which caused global oil shortage,” they said.

According to the experts, the decision to hike borrowing costs is exceeding market expectations of a hike between 175bps to 225bps. Also, the Nigerian fixed-income market has seen some pricing-in, as some of the debt instruments have seen increasing yields.

They said: “Sticking to maintain a hawkish stance amid the present socio-economic problems confronting the Nigerian economy is a tough but bold move by the CBN. This move reiterates the CBN’s commitment to maintain price stability in the country. It will have been expected that based on recent data such as inflation, unemployment, and GDP, showing signs of weaknesses in the economy, the CBN will have taken a more subtle approach in its fight against inflation.”

Comercio Partners have also observed a snag in the intricate relationship between interest rates and inflation in Nigeria, which they argue, defies the conventional wisdom that dictates an inverse correlation.

They said: “Despite economic theory positing that an increase in interest rates should curtail borrowing, thereby reducing available credit and subsequently dampening the general price level, the empirical evidence in Nigeria fails to unequivocally validate this hypothesis.

“However, a nuanced perspective suggests that the pace at which interest rates ascend might hold more relevance in influencing inflation dynamics within the Nigerian context. Notably, the Central Bank of Nigeria’s proactive measures aimed at strengthening the transmission mechanism of the monetary authority play a pivotal role in shaping this complex interplay. The effectiveness of these efforts in modulating the impact of interest rate changes on inflation remains a critical aspect warranting continued scrutiny and analysis within the realm of economic research for our investment bank.”

Analysts at the firm also say that a discernible negative correlation between GDP growth and the Monetary Policy Rate (MPR) in Nigeria aligns with theoretical expectations.  “This correlation signals that the Central Bank of Nigeria’s persistent aggressive approach may exacerbate the strain on the already fragile economy. With consecutive annual deceleration in GDP growth over the past two years and heightened borrowing costs, businesses face challenges in investing to enhance production capacity, potentially impeding increased output,” they maintain, adding: “Caution is warranted for the Central Bank to avoid triggering a crowding-out effect that could precipitate a recession. Despite the challenging economic climate, the CBN’s steadfast stance against inflation carries potential risks, including businesses struggling with rising production costs, diminishing demand, forex crises, and other pertinent challenges that may lead to the gradual erosion of economic vitality.”

Analyst’s commentary: “The CBN’s move to hike interest rate by 400bps, putting the MPR figure at 22.75%, is expected to cause increased strain on the economy, especially businesses. The country, despite its resilience, might not have enough room to contain the latest hike in interest rates. The economy, which currently faces a series of fluctuating social and economic challenges, may be pushed further into devastation as an increase in the minimum cost of borrowing in the economy may likely cause a slowdown in the corporate sector, leading to a decline in the stock market.

“Also, with this move, it is expected that the fixed-income space may see a sell-off as an increased interest rate makes old fixed-income securities unattractive, causing a fall in their prices and accompanied by increased yield. It is also expected that new issues both in the public and private spaces will attract higher yields.


“On the macroeconomic front, despite the increased interest rate likely to cause a slowdown in GDP growth and stock appreciation, the move may exacerbate the unemployment issue confronting the Nigerian economy. Although doubtful, we may see some degree of easing in the inflation figures before the end of the year.”


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A highly motivated, creative, and versatile economist, researcher, analyst, and writer/commentator on economic development with bias for and experience in community development, citizen wellbeing, financial and corporate analysis.