Feb 23 (Lagos) - The monetary policy committee (MPC) of the Central Bank of Nigeria will hold its first meeting on 2024 next week in what will be a very important one for the economy. This is because this is a new MPC and many scheduled meetings were cancelled in the last quarter of 2023 when the Naira was tumbling. The MPC is likely to hike the Monetary Policy Rate (MPR) also known as CBN's key benchmark lending rate.
Basic economic theory insists that benchmark interest rates have to be above the inflation mark in order to control inflation and support the local currency. This was recently seen in Countries like USA and UK where they raised the interest rates on time and now inflation has been reined in sharply to acceptable levels.
CBN under the immediate former Governor Emefiele decided to not follow basic economics and kept the interest rate sharply below the inflation rate for years and years helping inflation become a monster that we are now staring at. This was a disaster in the making that is bearing fruit today in the form of hyper-inflation and constant Naira devaluations.
We can still remember the infamous MPC meeting from November 2015 where the CBN hiked interest rate and the cut the interest rate in February 2016 just 3 months later. Such was the level of flip-flops of the CBN policy under the immediate past Governor.
When interest rate is sharply lower than inflation, it weakens the local currency and that is what we witnessed from 2015-2023. Yes there are Dollar shortages but interest rates play a key role in determining exchange rates of a currency.
Former CBN regime also made is highly unattractive for Nigerians to save in Naira because he kept the interest rates so low that people had to look for other assets for investments such as Crypto, forex, sports betting or even scams like MMM became popular.
The Current CBN Governor will have to bite the bullet and make the decision on how high the interest rate would be now that core inflation is at almost 30% while food inflation is at 35% and the key lending rate is at 18.5% more than 1000 basis points lower.
Over the past week the CBN has been publishing the photos and names of the members of the MPC that will make the decision.
In the opinion of easykobo analyst, this is unprecedented because the CBN Governor will make the move to sharply hike the interest rate but needs other members on the committee to share the blame which will come from the business community starting next week. It could be a big hike going by the preparation in the media with all the sensitization of the MPC member profiles to the public. So it does not look like this is a one man decision but a collective one for the better of economy in the long run.
A sharply higher interest rate would mean that businesses with debt on their books would pay more to service that debt but in reality no banks in Nigeria.
Our analyst expects the Banks to benefit from this move although no bank is issuing debt at the key benchmark levels even now. However this rate hike would depress the market in the short term especially stocks of those companies with a lot of debt on their books.
In our opinion, it has been shocking that CBN failed to address the key benchmark lending rate situation from 2015 to 2023. That is what really stoked inflation in the economy and CBN played a big part in manufacturing that inflation.
Let's see how far the current CBN Governor and the MPC is willing to go to save the day.