Mixed reactions trail CBN’s rate decision

The quest to tame inflation and bridge the negative real rates, attract investments and raise savings may be a mirage, if oil crisis persists and monetary-fiscal measures cannot converge in the shortest period.

This captures the positions of financial analysts and real sector operators, who projected a varying outcomes in months to come, as the nation’s benchmark interest rate, currently put at 14 per cent, begins to generate mixed feelings.

According to the real sector operators, manufacturers are in a fix, as access to foreign exchange remains limited while their woes have been compounded with the hike in interest rate.The Monetary Policy Committee of the Central Bank of Nigeria (CBN), on Tuesday, favoured the increase of the Monetary Policy Rate by 200 basis points, saying it is to curtail negative rates against inflation level and attract foreign investment.

The decision, which came as a surprise to majority of financial analysts who had projected unchanged rates, however, said the development, which has effectively reduced negative real interest rate from -4.5 per cent to -2.5 will attract foreign portfolio inflows.

But an economist, Dr. Ogho Okiti, said although the decision would add to the currency stability, it is very unlikely to curtail the inflationary pressures largely attributed to cost-shocks.“We are of the view that tightening the interest rate, which will reduce negative real interest rate will come as good news particularly for foreign portfolio inflows. But given the nature of Nigeria’s financial system, interest rates generally paid on savings by commercial banks in Nigeria are usually not dependent on the benchmark rate.

“We think that savings account holders, who have seen the real returns on their savings wiped out by rising inflation are unlikely to be beneficiaries. We also think the move could not only help to exacerbate the current difficult operating environment for firms, but would also lead to an increase in cost of funds for net borrowers and thus, dampen corporate investments,” he said.

President, Manufacturers Association of Nigeria (MAN), Dr. Frank Jacobs noted that the only way to industrialise and encourage diversification is when loans are less than 10 per cent, adding that the MPR at three per cent might transform the banking sector to fund SMEs and other vibrant sectors of the economy.

“The overall effect of the MPR is not good for the manufacturing sector. No one is investing in the economy, both local and international investors. Access to cheap funds is key in driving investments in the real sector. What this means is that many manufacturers may close down and this may lead to job loss”, he added.

For the Lead Director of Centre for Social Justice, Eze Onyekpere, there seems to be a debilitating fixation with monetary policy and what happens to the value of the naira, with all eyes on the Central Bank of Nigeria and its Monetary Policy Committee.

“While monetary policy is important, it will not achieve the desired results if it is not complemented by fiscal policy. The expectation and promise of the administration to reflate the economy with a stimulus package would have matched the monetary policy positions of the CBN. We may not have exactly seen Nigeria in this recession.

“There is unusual delay in implementing the budget, may be, due to paucity of resources which raises issues around budget planning and revenue forecasting for the 2016 federal budget. The full implementation of the capital components of the 2016 federal budget is imperative,” he said.

Meanwhile, a currency and Research analyst at FXTM, Lukman Otunuga, who expressed his surprise over the decision, noted that this is the second time interest rates have been raised within six months in an effort to mitigate the mounting pressures on a weakening Naira.

“With the current rates at 14 per cent, this has been the highest level ever and displays how the central bank will do all it must to guide the nation back onto the path of economic recovery.

“Sentiment still remains bearish towards Nigeria, and the recent decline in oil prices may punish the nation further. As of now, Naira vulnerability may be a theme and further declines in value could be expected as the local currency is guided by the natural forces of supply and demand.“It should be kept in mind that the nation’s problem remains depressed oil prices and the key is diversification, which could throw up some benefits in the longer term,” he added.