14% MPR will trigger inflation – experts

The retention of Monetary Policy Rate (MPR) at 14 per cent will increase inflation rate and the banking sector non-performing loans (NPLs) profile,’’ some financial experts said on Wednesday.

They told the News Agency of Nigeria (NAN) in Lagos that the retention of MPR was not in the best interest of the country, saying that it would escalate the inflation rate.

The experts spoke on the outcome of the Monetary Policy Committee (MPC) meeting held on Nov. 21 and 22 in Abuja. NAN reports that the MPC at the meeting retained the interest rate at 14 per cent and also retained the Cash Reserve Requirement (CRR) at 22.5 per cent.

NAN reports that the liquidity ratio was also retained at 30 per cent.

In his remarks, Dr Glenn Prince-Abbi, the Executive Consultant/Chief Executive Officer, Espera Global Corporation, said that the decision to retain all the key indicators was worrisome.

According to him, it will increase inflation rate and worsen the present economic recession.

Prince-Abbi said that reduction in the interest rate would improve the cost of doing business and boost companies profitability.

He said that the headline inflation which was already at a ceiling breaking of 18.33 per cent would remain or even worsen with the MPC decision.

“The action of the MPC to retain all the key indicators is worrisome.

“It does appear to me that the Central Bank of Nigeria (CBN) believes ever so strongly that no form of actions on adjusting monetary policy instruments is needed to work in synch with the ongoing fiscal policy propositions by the government,” he said.

Prince-Abbi wondered how the nation’s economy could get out of recession with high interest rate that determines the cost of money used in the production process.

“How can we depend strictly and solely on fiscal policies to make the necessary adjustments and keep sacrosanct and untouchable fundamental monetary instruments,” he queried.

According to him, the high interest rate regime which is retained has not allowed any form of reduction in the costs that producers are already contending with.

Prince-Abbi said that the monetary policy instruments alone could not engender or trigger economic growth, but could only contribute to stifling growth and worsening unemployment.

He said that high interest rate regimes, as part of the monetary policy engineering, were adopted by the national economies partly to check over-supply when such arises.

“This stringent policy of high interest rate tends to be a cautionary measure taken by the CBN without examining the easing a lower interest rate would tend to allow for producers and all the actors within real sector within the economy.”

Also, Dr Uche Uwaleke, the Head of Banking and Finance Department, Nasarawa State University, Keffi, told NAN that the ripple effect of the present MPC stance would compound the problem of NPLs.

Uwaleke said that banks NPLs would increase because high interest rates would make repayment of loans more difficult.

“The stock market, which is currently on a bearish trajectory on account of waning investor confidence, will be worst hit,” he said.

Uwaleke said that portfolio investors were bound to revise their portfolios in favour of the government securities.

He said that share prices would plunge further when investors dispose their shares to invest in government bonds and treasury bills whose yields were currently high due to high policy rate of the CBN.

Uwaleke said he wished that the MPR and reserve ratios were slightly reduced by the apex bank.

He said that the decision of MPC to retain MPR and reserve ratios at their present high levels might help to curtail the pressure in the forex market.

“It will slow down the pass on effect of high exchange rate on foods and other imported items.

“Unfortunately, this tight monetary policy stance jeopardises the country’s chance of exiting the present economic recession.

“It will be difficult to jump start growth in an economy where the average commercial banks’ lending rate is over 20 per cent with many businesses choking under high cost of doing business.

“The high MPR at 14 per cent implies high cost of borrowing, not only by individuals and firms, but also by the government that is depending on deficit financing to bridge infrastructural gap.

“So, domestic investments are bound to decline with adverse consequences for an economy that has officially recorded a contraction in GDP for three consecutive quarters this year,” Uwaleke said.

NAN