The increase in benchmark interest rate by 200 basis points by the Central Bank of Nigeria (CBN) on Tuesday would further burden the real sector and could worsen the volatility at the equities market.
But the increase appeared targeted as support for the tottering foreign exchange management to woo foreign investors.
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) on Tuesday increased the Monetary Policy Rate (MPR) by 200 basis points from 12 per cent to 14 per cent. The apex bank however retained the Cash Reserve Requirement (CRR) at 22.50 per cent, the Liquidity Ratio (LR) at 30 per cent and the asymmetric window at +2 per cent and -5 per cent.
According to analysts, while the increase was expected given the jump in inflation rate to 16.5 per cent, the decision would have far-reaching effects on the economy and the financial markets.
Analysts at Capital Bancorp said the increase could lead to more activities in the fixed income segment of the financial market and banks would rather choose to place their funds in government securities than lending to the real sector of the economy as the rate of non-performing loans continue to rise.
“We opine that the hike in benchmark interest rate will negatively impact the cost of borrowing to the real sector as banks reprice current interest rates on existing loans. We note that this will particularly affect the small-medium enterprises, hindering expansion plans and thus necessitating the need to pass-on the higher operating costs to consumers,” Meristem Securities stated.
President, Manufacturers Association of Nigeria (MAN), Dr. Franks Jacobs said the rate hike was not favourable to the manufacturing sector.
“MPC at 14 per cent to the commercial banks will go higher when manufacturers finally obtain loans from banks because they will mark it up. Currently, we learnt that some banks are lending at 26 per cent.
It is not possible to sustain the manufacturing at this level,” Jacobs said, adding that manufacturers are already faced with myriad challenges with issues such as poor infrastructure provision, multiple taxation, poor regulatory frame in addition to unhealthy operating environment.
Director-General, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) Mr. Emmanuel Cobham criticised the MPC noting that it would compromise the real sector. He wondered how manufacturers would finance their raw materials and operation with such high interest from banks.
Head, Research, FSDH Merchant Bank, Ayodele Akinwunmi, said while the CBN faced a policy dilemma between growth and curtailing the rising inflation, what Nigerian economy needs now is policy to drive growth now than inflation.
