Heavy reliance on MPR to control inflation ineffective, say analysts

Financial experts argue that the CBN’s reliance on the Monetary Policy Rate (MPR) to control inflation is ineffective due to non-monetary factors like high energy costs and regional insecurity.

It would be recalled that the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) has raised the benchmark interest rate by 150 basis points, increasing it from 24.75 per cent to 26.25 per cent.

CBN Governor Yemi Cardoso attributed the third consecutive interest rate hike in 2024 to the continued efforts to moderate inflation, which reached 33.69% in April 2024, according to the National Bureau of Statistics (NBS).

The President of the Association of Capital Market Academics of Nigeria (ACMAN), Professor Uche Uwaleke, in an exclusive interview with Nairametrics, said that the heavy reliance on the MPR to control inflation seems ineffective, given the significant non-monetary factors driving inflation in Nigeria such as high energy and transportation costs, as well as insecurity in the country’s food-producing regions.

According to him, there is an inverse relationship between interest rates and equity market returns, and this rate hike could lead to portfolio rebalancing in favour of fixed-income securities.

“If I had been a member of the Monetary Policy Committee (MPC), I would have voted to maintain the current rate,” he stated. “The aggressive policy rate hikes are adversely affecting output, as the high cost of funds stifles production.

The ACMAN President expressed concerns that the current monetary policy may not adequately address the root causes of inflation in Nigeria, while simultaneously imposing burdens on economic production and growth.

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Managing Director of Highcap Securities Limited, Mr. David Adonri, expressed surprise at the recent decision to further hike the interest rate, noting that he had expected the Monetary Policy Committee (MPC) to refrain from such action given the recent moderation in the inflation rate.

He remarked, “At this rate, the increase may negatively impact production while simultaneously escalating the cost of imports.”

Adonri noted the growing concerns within the financial community about the potential adverse effects of continued interest rate hikes on the broader economy, including industrial output and import expenses.

The Managing Director of Arthur Steven Asset Management Limited and former President of the Chartered Institute of Stockbrokers (CIS), Mr. Olatunde Amolegbe, on his part, noted that the recent interest rate hike was anticipated due to the ongoing rise in inflation and instability in the foreign exchange market.

“The move can be considered moderate, given the aggressive tightening we’ve seen from the MPC in recent months,” Amolegbe stated. “It appears that the Committee believes the impact of exchange rate volatility on inflation is more significant than that of interest rates, hence the decision to continue tightening by raising policy rates. However, it is clear that monetary policy actions alone will not stem the rise in inflation.”

Analyst and Head of Research at FSL Securities Limited, Mr. Victor Chiazor, said that inflation remains largely driven by food inflation which has risen above 40%, noting that further tightening may even worsen food inflation, especially for food producers exposed to debt financing.

He noted that the government must shift focus towards addressing fiscal issues triggering inflationary pressures such as high energy prices, insecurity, bad infrastructure, and high exchange rate amongst other issues as that is the only time we may see a steady reversal of this upward trajectory.