CBN Hinges Planned Interest Rate Easing On 21.4% Inflation Target

Ahead of its first Monetary Policy Committee (MPC) meeting slated for next month, the Central Bank of Nigeria (CBN) has said, once it achieves its 2024 inflation target of 21.4 per cent, it plans to scale back monetary policy to lower interest rates to stimulate economic growth.

This is as an economist analyst advised the MPC to raise the Monetary Policy Rate (MPR) to increase the real interest rate and encourage investment.

CBN’s deputy governor, Economic Policy, Muhammad S. Abdullahi while speaking in Lagos yesterday, said that the implemented monetary and fiscal policies will lead to a relaxation of foreign exchange constraints in the foreseeable future.

On the other hand,  Chief Consultant of B. Adedipe Associates Ltd, Dr ‘Biodun Adedipe, said that the current situation in Nigeria with a high inflation rate and low interest rates had led to a negative real interest rate, which in turn had been discouraging investment.

According to him, negative real interest rate occurs when the inflation rate subtracted from the interest rate results in a negative value.

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Adedipe emphasised that economic growth and development rely heavily on investment, which is being hindered by the current conditions.

Speaking at the 10th National Economic Outlook, organised by the Chartered Institute of Bankers of Nigeria Centre for Financial Studies, in collaboration with B. Adedipe Associates Ltd., on Tuesday in Lagos.

Adedipe, anticipated the committee to raise interest rates to address the issue and encourage economic growth.

He said, “inflation rate latest figure for December 28. 92 per cent, Monetary Policy Rate, 18. 75 per cent, that’s a real differential which when interpreted means negative interest rate.

“So ordinarily for any central or reserved bank in the world, they want to reduce that differential and move it more to a positive real interest rate in which case, that is what will incentivize investment. That is a typical approach to orthodoxy in monetary policy.

“So, if we look at that alone, then we should expect that monetary policy rate will be raised by the monetary policy committee which of course we have now a tentative agenda of its meeting commencing February this year.’’

Meanwhile, CBN deputy governor, Abdullahi, who was represented by director, Monetary Policy Department, CBN, Muhammed Tumala said “Inflationary pressures may persist in the short-term but are expected to decline in 2024. The recently introduced inflation-targeting policy of the Bank is expected to rein-in inflation, which is projected to decline to 21.4 per cent, following the crystallisation of government reforms, despite its persistence in 2023.

“Food inflation is expected to decrease due to improved agricultural productivity. The expected deceleration will largely reflect the base effect of Government reforms in energy and the easing of global supply chain pressures. This would boost consumer confidence and purchasing power, benefiting businesses across the board.

“The CBN will then adjust its policy rate in response to inflation trends, and a decrease in inflationary pressures can prompt a more accommodative monetary policy. Lower interest rates mean that the cost of borrowing for businesses decreases, making capital more accessible. This, in turn, can stimulate investment, businesses, fuelling growth and job creation”.

Stating that the CBN’s decision to adopt the inflation-targeting framework to achieve its core mandate, he said: “inflation targeting involves using monetary policy tools such as the policy rate to achieve a specific inflation rate within a targeted range. The aim is to maintain price stability, which is crucial for human welfare, businesses and sustainable economic growth.

“The CBN’s approach in achieving price stability for businesses in an inflation targeting regime will involve a combination of clear communication, use of monetary policy instruments, collaboration with fiscal authorities, amongst others. For instance, clear communication of this target is vital for business as it shapes expectations, influences investment decisions, and guides economic planning.

“These Inflation targeting initiatives will contribute to overall economic stability, fostering market confidence. Stable economic conditions will positively influence consumer behaviour. Businesses can thrive in an environment where consumers feel secure and confident in the economy.”

On the exchange rate regime, he said, the major policy thrust of the CBN is the pursuit of a flexible exchange rate regime that has resulted in the unification of the foreign exchange market into a single window.

“Also, the bank has reverted to the conventional monetary policy approach with a focus on attaining price stability, which fosters sustainable economic growth for Nigeria. The importance of low and stable inflation for businesses cannot be overemphasised.

“Therefore, it is important to note that the anticipated stability in the foreign exchange market would not only be attributed to a substantial reduction in the country’s petroleum products importation by 2024, but also to the recent market determined exchange rate policy of the CBN. Staff estimates reveal that exchange rate pressures is expected to decline significantly in 2024,” he pointed out.

He reiterated that the recent exchange rate reform, which aims to streamline and harmonise multiple exchange rates, plays a crucial role in eliminating distortions and uncertainties in the foreign exchange market.

Noting that the unification aligns with global best practices, promote transparency and reduce arbitrage opportunities, which had previously existed in the fragmented exchange rate system, he said: “a consistent and stable exchange rate not only bolsters investor confidence, signalling a commitment to market-driven policies, but also acts as a powerful magnet for foreign investment. This streamlined approach ensures a smoother operation of the economy, enhancing Nigeria’s attractiveness to global investors seeking stability and clarity in currency valuations.”

Another factor he states would spur the economy is the increased allocation to Small and Medium Enterprises Development Agency of Nigeria (SMEDAN).

He said: “Like a builder, the 2024 budget lays bricks for the future, prioritising critical infrastructure and human capital development. We have seen allocations for education, healthcare, infrastructure and other key sectors of the economy geared toward human development and growth.

“In terms of allocation, there is increased Government focus in medium enterprises. For instance, SMEDAN’s allocation SMEDAN increased by 238.87 per cent to N19.79 billion in 2024, compared with N5.84 billion allocation in 2023. This shows the government’s commitment to growing the business sector.”