CBN must strike balance between difficult economic demand and realistic approach – Tosin Osunkoya

The Co-Managing Partner and CEO of Comercio Partners Asset Management, Tosin Osunkoya, has said that the Central Bank of Nigeria must strike a balance between controlling price stability, inflation, and exchange rate with a realistic approach to solving these difficulties effectively.

Osunkoya made this statement after the just concluded July 2023 MPC by the Central Bank of Nigeria, in a statement viewed by Nairametrics.

He also added that increasing the MPR by 25 basis points to 18.75% demonstrates the Committee’s concern about the consequences of cost-push inflation.

Need for balance

Osunkoya noted that the Central Bank is faced with the complex and difficult duty of controlling price stability, inflation, and exchange rate all at the same time, adding:

“In addition to these considerations, the CBN must develop policies that encourage sustainable economic growth.

“ However, it is critical to recognise that reaching all three of these economic objectives at the same time may be a difficult and complex task in the current context.

“Striking a balance between these demands can be difficult, and a realistic approach is essential to solve these difficulties effectively.

Rate Hikes

He added that the MPC’s decision to raise the benchmark interest rate (MPR) by 25 basis points to 18.75% demonstrates the Committee’s concern about the consequences of cost-push inflation, Citing that Cost-push inflation happens when the cost of capital (a critical element of production) rises as a result of a policy rate increase, he added:

“However, by hiking interest rates, the CBN hopes to alleviate inflationary pressures caused by growing manufacturing costs, which have been contributing to the persistent surge in headline inflation.

“The narrowing of the asymmetric corridor around the MPR to +100/-300 basis points is a significant step towards giving more stability to the broader interest rate framework and preventing excessive interest rate volatility.

He also noted that the acknowledgement that forex supply issues are contributing to exchange rate volatility shows the challenges that the forex market faces, urging that this highlights the importance of more reforms to improve the efficiency of the FX market and attract more foreign investment.

He also urged that Investors should stay cautious and seek diverse options that consider the complicated economic issues and changing regulatory landscape in Nigeria, adding:

“Overall, the CBN’s decision to hike interest rates demonstrates the central bank’s commitment to combating inflation and preserving price stability.
“The broader economic picture, on the other hand, necessitates a multifaceted approach that considers structural reforms, fiscal policies, exchange rate management, and measures to foster long-term economic growth.

The MPC

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) increased the benchmark interest rate (MPR) by 25 basis points to 18.75% from its initial 18.5%, representing the highest interest rate in 22 years.

Acting CBN governor, Folashodun Shonubi revealed this during a press briefing, after the two-day MPC meeting on Tuesday, 25th July 2023.

This is the first MPC meeting chaired by the new acting CBN governor, following the suspension of Godwin Emefiele.

Highlights of the MPC decision
 
The MPR was increased by 25 basis points to 18.75% 

The asymmetric corridor was narrowed to +100/-300 basis points around the MPR from +100/-700 basis points 

CRR was retained at 32.5% 

The liquidity Ratio was also kept at 30% 

Nigeria’s headline inflation surged to 22.79% in June 2023, which is the highest rate since September 2005. This is despite multiple interest rate hikes by the CBN in the last 14 months.