MONEY MARKET: Dangers Of Over-tightening Amid SVB Lessons

In line with projections, the Monetary Policy Committee (MPC) rose from its second meeting of the year, raising benchmark interest rate by 50 basis points to 18 per cent making it the fifth highest in Africa.

Nigeria’s benchmark interest rate of 18 per cent, which is the same as Malawi follows the pattern of Zimbabwe, Ghana, Sudan and Sierra Leone whose  interest rates are 150, 28, 27.3 and 18.25 per cents respectively. The country moved into this position as the MPC slowed on its aggressive tightening stance.

To curb the rising tide of inflation, the MPC had, since last year, continually raised interest rate, bringing the total consecutive rate hike to 650 basis points. At the end of its 290th meeting, it voted in favour of continued contractionary monetary policy to tame rising inflation.

The committee projected that price pressure would subsist owing to the perennial scarcity of PMS and ongoing discourse around the removal of fuel subsidy which it expects to be by the end of the tenure of the present administration. It also considered the risks of financial contagion from banking crisis in the US and Switzerland, where Silver Valley Bank (SVB) and four other banks have presently been affected and spreading.

Although, the CBN governor, Godwin Emefiele assured that there is currently no direct impact on the Nigerian banking industry, the MPC highlighted that it examined the impact of further policy rate hikes on the stability of the banking system.

While the persisting headwinds to headline inflation provide a compelling argument for an upward adjustment to the key policy rate, albeit slowly, the committee had highlighted that it examined the impact of further policy rate hikes on the stability of the banking system, considering the recent cases of bank failure in the United States and Switzerland.

Convinced that further rate hikes would not adversely impact the Nigerian banking system’s stability, the committee called on the CBN to strengthen its regulatory oversight of the banking system to ensure that the banking industry remains stable and resilient.

According to analysts, the further tightening could halt economic growth as businesses which are already struggling are further hit by higher interest rates. Members of the MPC anticipate that Nigeria will see a GDP growth of about 3.03 per cent, based on CBN’s favourable outlook on sustained expansion in services and agricultural sectors.

To analysts at Cowry Assets Management, the 50bps increase in the policy rate as a tool to tackle accelerating inflation could possibly lead to slower growth and further drive down the total money supply with the aim of achieving sustainable economic growth and price stability.

“However, rising inflation has continued to be a front burner in most economies across the globe, including Nigeria, and is escalating the price stability plans far from the hands of the monetary authority—an economic growth trade-off that may further drive the central bank’s position for an extended contractionary stance.

“Similarly, we continue to see the downside risks of pressures from inflation as the central bank’s aggressive monetary policy tightening measures will largely depend on the path of inflation,” Cowry Assets analysts pointed out.

Commenting on the decision of the MPC, analysts at Cordros Research noted that, since the SVB’s failure, there has been a material shift in market expectations, with consensus pricing a 25bps increase in the key policy rate apiece at the March and May policy meeting, after which the Fed is likely to adopt a hold stance at subsequent meetings.

“Moreover, despite the recent challenges, we think if the US Fed abruptly stops hiking the Fed rate to drive inflation back to the target, it could damage its forward guidance credibility, driving inflation higher. The preceding could fuel higher rates in the future than currently priced. Thus, we lean towards the current market expectations.

“In our view, these expectations are positive in shaping the CBN’s monetary policy decisions going forward. Nonetheless, in the domestic economy, consumer prices are expected to remain sticky despite the favourable base effects. Moreover, the near-term growth outlook remains clouded by increased downside risks exacerbated by the self-inflicted impact of the CBN’s Naira redesign drive amid increased production costs.

“On a balance of factors, given that the end of rate hikes by systemic global central banks is in sight amid sticky domestic inflation, we think the MPC is likely to maintain a slower rate hike at its next policy meeting. Indeed, at the post-MPC conference, the CBN governor guided that maintaining an aggressive tightening poses risk to financial system stability. Accordingly, he stated that the MPC will adopt a strategy of smaller rate hikes going forward to narrow the negative real returns amid the risks of over-tightening,” Cordros Research analysts pointed out.

Analysts at Afrinvest West Africa recommended that the CBN rethink its strategy around the anchoring of inflation expectations – the reasons for another interest rate hike.

To them, “if the overall theme is to tame monetary-induced inflation, then, financing conditions should reflect the same (however treasury bills rate have remained well below both the MPR and inflation rate). Additionally, the bank’s policies including cashless program should be executed to complement price-stability objective while fiscal interventions and FG overdraft financing should be reviewed in light of current realities.”