Assessing CBN Hawkish Stance Against Inflation, Banks’ Profit

The Central Bank of Nigeria (CBN) last week further established its hawkish stance in a bid to reduce the rising tide of inflation in the country.

With inflation at a 17-year high of 19.64 per cent, the apex bank had reversed two of its earlier decisions.

At its last Monetary Policy Committee (MPC) meeting in July, where benchmark interest rate was raised for a second time this year to 14 per cent, the CBN governor, Godwin Emefiele had said, the apex bank will continue to raise MPR if inflationary pressures persist. With inflation not abating, the CBN had taken further steps to compliment its hawkish stance.

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First, it increased the interest payable on savings in commercial banks from 19 per cent of Monetary Policy Rate (MPR) to 30 per cent. At its July meeting, the MPC had raised MPR to 14 per cent. The upward review of interest on savings was stated in a circular signed by the CBN director, Banking Supervision, Haruna Mustafa, and issued to all banks dated August 15, 2022.

With the new circular, banks are expected to increase interest rate on savings from 10 per cent of MPR to 30 per cent with effect from August 1, 2022. Consequently, bank customers can now earn up to 4.2 per cent which is 30 per cent of the 14 per cent MPR as against 1.4 per cent which was 10 per cent of the MPR.
Two days later, the CBN issued another circular which reversed a circular which it had issued earlier this year. In March this year, the apex bank had extended the regulatory forbearance for the restructuring of facilities under its intervention funds, keeping the interest rate on the funds at five per cent till February 2023.
However, the CBN, in a circular dated August 17, 2022, issued to all banks and other financial institutions, signed by the director, Financial Policy and Regulation, Chibuzor Efobi said the return to nine per cent will take effect from September 1, 2022.
Effectively, individual and corporates who had taken facilities under the CBN interventions and were supposed to have a grace of one year to enjoy the five percent rate will from next month reverse to paying nine per cent interest rate which the facilities had before the Covid-19 pandemic.
These moves by the apex bank, analysts said, are part of efforts at reducing money in circulation by making saving more attractive whilst increasing rates on lending.
According to analysts at Afrinvest West Africa, beyond the growth comfort argument presented, the recent switches by the CBN were informed by the unpleasant trend in consumer inflation to new highs and the pessimistic outlook ahead of the main electioneering period.
The latest inflation data as released by the National Bureau of Statistics (NBS) show that headline inflation spiked 105 basis points to 19.6 per cent in July, the highest since the NBS began tracking inflation data in 2009. Of the two sub-components of the headline rate, the food inflation rate rose the highest by 141bps to 22.0 per cent, while the core inflation sub-component rose 51bps to 16.3 per cent, the highest since January 2017.
Analysts at Afrinvest noted that, “while efforts to rein in inflation are laudable, the multi-faceted nature of domestic inflation including significant non-monetary drivers could elevate the cost of measures that have been adopted to curtail liquidity in the economy.
“For one, we do not expect the uptick in local currency minimum savings deposit rate to drive significant growth in customers’ deposits of banks especially in the retail segment which is less sensitive to deposit rates trend. On the other hand, the cost of mobilising deposits should trend higher with negative implications for banks’ interest expenses amid an expansion of interest rates in the economy.
“In sum, the cost of funds and net interest margins of banks will likely deteriorate and weigh on profitability. Sadly, we do not see banks being able to minimise this cost pressure from gains on trading income as yield environment remains artificially low.
“Beyond banks and other financial institutions, risk asset creation could stall amid the hawkish policy tilt and given the fragilities of the domestic economy, there is a tangible risk that non-performing loans could reverse its downtrend (assuming banks align with the 65.0 per cent LDR policy) if economic activities plateau.”