The Ripple Effects Of Elevated MPR On Business Operations and Socio-Economic Dynamics In Nigeria

The Monetary Policy Committee of the Central Bank of Nigeria, implemented an interest rate hike by increasing the rate by 200 basis points to 24.75% from 22.75%. This initiative, led by the Governor of the Central Bank of Nigeria, Olayemi Cardoso, is intended to tackle ongoing inflationary pressures and stabilise exchange rate fluctuations.

This decision was followed by numerous extensive discourse and analysis across various social media platforms, underscoring its substantial impact on Nigerian businesses, their customer base and the economy in general.

What does Monetary Policy Rate (MPR) mean?

The Monetary Policy Rate is a standard interest rate established by the Central Bank of Nigeria in order to govern monetary conditions within the economy. It can also be described as the price tag placed by the Central Bank on borrowing money. The essence of this Monetary Policy Rate is to combat inflationary pressures and maintain economic stability.

The Central Bank of Nigeria also utilises the Monetary Policy Rate to offer insight into their assessment of the economy’s performance. This Monetary Policy Rate is adjusted by the Central Bank of Nigeria to either mitigate inflationary pressures or stimulate economic expansion. When the Monetary Policy Rate is increased, borrowing becomes more expensive, which can help control inflation. On the other hand, when it is decreased, borrowing becomes cheaper and this encourages spending and growth.

The Monetary Policy Rate (MPR) was introduced by the Central Bank of Nigeria in 2006 in order to replace the Minimum Rediscounted Rate (MRR) due to the ineffectiveness of the latter. This action was taken with the aim of reducing the fluctuation of interest rates in money markets and fostering a transaction rate that would enhance the effectiveness of monetary policy actions, ultimately leading to the stabilisation of the domestic currency's value.

THE IMPACT OF INCREASED MONETARY POLICY RATES

An increase of the Monetary Policy Rate may be regarded as a contractionary monetary policy. The aim of a contractionary monetary policy is to increase interest rates and restrict the amount of money in circulation to slow growth and decrease inflation. However, it is trite to note that there is no absolutism in economic theories and it is important to consider the prevailing economic conditions and other contextual factors prior to choosing a suitable economic theory, as it ensures alignment with the dynamic nature of the economy and enhances the effectiveness of policy decisions.

Although increasing the Monetary Policy Rate can assist in tackling inflationary pressures and fostering long-term economic stability, it may concurrently yield short-term adverse impacts on economic growth, investment, and consumer spending.

The Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, and the Nigerian Association of Small Scale Industrialists characterized the interest rate hike as a decision fraught with unintended adverse effects, and asserted that the increase in the Monetary Policy Rate was an inevitable cost for businesses, considering the prevailing economic conditions. They also stated that the rise in the Monetary Policy Rate would further hinder the private sector's access to cost-effective credit.

According to the President of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Dele Oye, the increase of the interest rate bears several repercussions specifically on the private sector such as:

An uptick in borrowing expenses, inadvertently discouraging entrepreneurial endeavors and expansion initiatives, both pivotal for fostering economic growth and generating employment opportunities.

The transfer of expenses to consumers via elevated prices for goods and services may fuel inflation rather than alleviate it.

The possibility of stifled economic growth based on the fact that tightened monetary conditions could trigger a decline in both investment and consumption, which are critical drivers of economic growth.

Faith Iyoha, an economist at the Nigerian Economic Summit Group stated that the frequent

Monetary Policy Rate hikes is an ineffective measure for addressing the country's inflationary challenges. This is based on the fact that a relationship between prices and productivity exists and inflation cannot be properly tackled without leaning on productivity. Additionally, she stated that this may lead to overheating of the economy and the tightening measures might prove excessive for productivity, potentially resulting in a decline in GDP.

The Director/ Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Dr, Muda Yusuf, stated that the increase would limit the ability of the banks to bolster economic growth and investment. He averred that while the decision aligned with the standard policy approach of Central Banks worldwide, it overlooked unique domestic circumstances.

DOES AN INCREASE OF MONETARY POLICY RATES EFFECTIVELY CONTROL INFLATION?

Several Central Banks have utilised an elevated Monetary Policy Rate to mitigate inflation in their respective countries. Some of these countries include: Brazil, Turkey and Chile. In the 1970s and 1980s, Chile had high inflation that reached over 300%. The Central Bank of Chile successfully reduced inflation by increasing interest rates as well as implementing a monetary policy rule that linked the money supply to the pace of economic growth. In the 1990s, the Central Bank of Brazil successfully mitigated inflation by employing tight monetary policies such as the increase of interest rates. Turkey also achieved this in the early 2000s by increasing the interest rate and decreasing money supply.

While it may seem that increasing interest rates effectively combats inflation, it is important to acknowledge that the success of a monetary policy hinges greatly on the specific dynamics of a country’s economy. A crucial question to consider at this point is whether the rise in the monetary policy rate can effectively address inflation in Nigeria.

There are various reasons why the elevation of the Monetary Policy Rate may not effectively address inflation in Nigeria. Some of these reasons include:

The Nigerian economy is not a credit-driven economy, whereby credit plays an important role in facilitating consumption, investment and economic growth. Therefore, the

Nigerian economy is not like advanced economies such as the United States, Switzerland, Australia etc. that have higher levels of financial inclusion, robust consumer credit framework and a strong correlation between interest rate and aggregate demand.

The inflation in Nigeria is largely supply-driven and any disruptions to that supply chain can result in artificial scarcity.

Despite consistent tightening of monetary policy over the past two years, there has not been a significant impact on inflationary pressures in Nigeria. In fact, the overall price level has continued to rise steadily.

CONCLUSION

In order to tackle inflation in Nigeria, the Central Bank of Nigeria should not view the financial landscape through the lens of other nations; rather, it should prioritise considering the stability of additional macroeconomic variables within Nigeria. The Central Bank of Nigeria needs to adopt a more focused strategy to combat inflation such as efforts to bolster the value of the Naira, alleviate supply constraints and promote financial inclusion.

In addition, addressing forex liquidity challenges can involve implementing suitable policy measures and incentives to encourage foreign investments while also tackling structural issues such as security to enhance the productivity and competitiveness of local businesses.