The Rate-fixing Monetary Policy Committee (MPC) begins what many in the financial circle have described as an extra-ordinary meeting today, amid fresh fears of inflation.
The committee members will review the 18-month old 11.5 benchmark lending rate with their minds on rising energy cost, monetary normalisation across the globe, the possibility of slowing growth and rising concern over inflationary pressure.
While many economists opt for a hold on the interest rate, a former member of the Committee and renowned professor of economics and public policy, Akpan Ekpo, said there was no sufficient justification for leaving the rate at 11.5 per cent.
Ekpo said the monetary authority cannot use the growth agenda to rationalise the continuous retention of the lending rate, stressing that “growth is only a necessary but not sufficient condition for economic development”.
The economist listed the global inflation pressure, bottlenecks in the economics that fuel inflation, the Russia-Ukraine crisis, rate hikes by the U.S.Federal Reserve as factors that support an increase in the lending rate.
“They left it for too long hoping that the fiscal side would do its part. But we have not seen much effort from the fiscal authority. If I were still a member of the MPC, I will opt for a rate hike” he said.
The professor maintained that growth could be deceptive, citing that an economy could be growing but not developing as the country has experienced in recent years. He, however, argued that a low inflation rate is key for achieving economic development.
“While growth is important, it is not a sufficient condition for development, whereas as prices continue to go up, it hits the poor very hard. So, inflation is very important. If I am part of the committee, I will consider the likelihood of a further increase in inflation and tinker with the MPR,” Ekpo insisted.
In contrast, a retired investment banker, Victor Ogiemwonyi, said the MPC could neither ignore the slow growth rate nor the pressure on prices. He expects the monetary authority to leave the interest rate unchanged to “take full advantage of high oil prices”.
There is a question in the financial system as to the possibility of passing changes in interest rate to the market to achieve the targeted contractionary effect on the money supply. For one, the non-prime lending is already close to 30 per cent, leaving some analysts wondering if MPR tampering will substantially increase the cost of the fund.
Also, previous trends have not shown that MPR has a strong transmission effect on commercial lending rates. In September 2020 when the rate was reduced by 100 basis points, interest rates remained unchanged.
Godwin Owoh, a professor of economics and expert in monetary tools, also observed that the transmission mechanism has broken down, saying MPC decisions have become mere rituals. He argued that the market does not trust its decisions, much less interact with them.
He added that the failure of the Board of Directors of the Central Bank of Nigeria (CBN) to clear the air on the speculated ambition of the Governor of the Bank, Godwin Emefiele, has serious implications for the integrity of the decisions of the Committee.
“The irony is that somebody was busy campaigning for Emefiele on a TV programme this morning. That raises concern about the neutrality of the decision of MPC. The idea of rate-fixing is that the market will react to your direction.
“That mechanism cannot work if the market has sufficient reasons to doubt the neutrality of the MPC. If people are campaigning without his consent, the governor who understands the implication should stop them. After that, you can begin to talk about a truly unbiased MPC,” Owoh maintained.
Another economist, Paul Alaje, told The Guardian in Abuja last night: “The MPC is meeting at a crucial point in history. The globe is more uncertain than it has ever been for various reasons. The invasion of Ukraine by Russia has presented a challenge because almost half of the global gas comes from these countries and others within Eastern Europe. So, if MPC increases rate, we are going to attract more foreign direct investments but inflation that is already 15.7 per cent is likely to go up.
“Again, our growth is not solid enough because all through 2021 we compared our growth with 2020, which was a weak year. If MPC reduces the rate, Nigeria will lose foreign direct investment because Nigeria will no longer be attractive. However, more people will be able to borrow and businesses will expand. So, whether they increase the MPR or not, it will still lead to major negative effects we won’t be able to manage.”
He suggested that the MPC should focus on other parameters such as liquidity ratio so that banks can have money or cash reserve requirements, saying, “as it is, we are running an economy that does not have a very solid base.
“Most challenges confronting us as a nation is not monetary but fiscal and trade. For example, the time it takes to clear goods at the Apapa port is too much. We are battling increased rates in the cost of goods and services because of associated costs that are avoidable. Also, there are no trade policies. I cannot trace two major trade policies that have been put together by the Federal Ministry of Finance, Budget and National Planning.
“There is the need to have the fiscal and trade policies which are absent in Nigeria today. For an economy to work efficiently, the monetary, fiscal and trade policies must work in harmony. As things are now, the trade leg has been amputated, fiscal is half-legged while monetary policy is the only one that is walking on two legs. So, if the monetary parameters are changed, Nigeria will still not be better.”
The Lead Director, Centre for Social Justice, Eze Onyekpere, said nothing significant would come out of the MPC decisions. Onyekpere said MPC policies had played very important roles in the past in growing and stabilizing the economy but that it has lost its relevance.
He said the time had come for the administration to call for a national economic summit where experts in finance, social and economy will come together to brainstorm and come out with practical solutions to the country’s socio-economic-political challenges.
He said: “There is not much the CBN through the MPC meeting can do today. Is it going to bring down the high prices of goods and services or make fuel available at our filling stations? There is nothing specific the MPC can do to make sure unemployment challenges are resolved in the country.
“There is nothing absolute to hope for from the MPC as there is a total collapse of the economy, there is also a collapse in the leadership structure across the country. We have collapsed social leadership, political leadership and economic leadership and expecting the MPC to perform magic will not work,” the activist said.
The MPC meeting comes a few days after the U.S. Federal Reserve voted overwhelmingly to increase the policy rate by 25 basis points, over two years after the rate was left at near zero to fight the impacts on COVID-19 on businesses.
