MPR Hike: Personal statements show CBN MPC members division on how to combat galloping inflation

In a majority decision at the Monetary Policy Committee (MPC) meeting in July, the Central Bank of Nigeria (CBN) voted to raise the Monetary Policy Rate (MPR) to combat the country’s soaring inflation rate, which stood at 24.08% for July.

The committee, however, showed divisions on how aggressively to tackle the issue, underscoring the complexities of the current economic landscape.

This was contained in the personal statements of members of the July MPC published on the website of the central bank.

The committee’s members were visibly divided over whether to raise the Monetary Policy Rate (MPR), hold it steady, or employ alternative measures to curb inflation.

Complexity in Rate Efficacy

MPC member, Salisu Mohammed brought attention to a troubling trend, noting, “Despite hiking the policy rate in the past eight meetings of the MPC, inflation has continued to rise, albeit at a slower pace.”
This suggests that either the MPR hasn’t been effective, or other monetary and fiscal factors are influencing inflation.

Mohammed voted to hold the MPR constant at 18.5%, suggesting that a comprehensive approach, involving both monetary and fiscal policies, would be more effective.

Diverging Opinions and Strategy

Another MPC member, Sanusi Aliyu argued that loosening the MPR would worsen inflation and encourage capital outflows.

Holding the rate could potentially “erode the gains made from the previous policy rate hikes,” he added. Aliyu voted to raise the MPR by 25 basis points to 18.75%.

Echoing Aliyu’s sentiments on tightening, acting CBN Acting Governor, Folashodun A. Shonubi stated that while tightening could constrain growth, unchecked inflation poses a greater threat to domestic stability.

Shonubi voted to raise the MPR by 50 basis points to 19.00%.

These new stances add layers to already complex views within the MPC. Members, Adenikinju Adeola and Adamu Edward voted to maintain the MPR at 18.5%, citing concerns about other economic pressures and the potential of other fiscal and monetary tools.

On the other hand, Aishah N. Ahmad advocated decisively for a rate hike to 19.00%, stating that the MPC must be committed to fighting inflation. She and the acting Governor proposed the most aggressive rate hikes.

Urgency in Action

Folashodun A. Shonubi emphasized the immediate need to tackle rising inflation, which he perceives as a greater threat to domestic stability than potential constraints on economic growth.

He voted for a substantial rate hike of 50 basis points to 19.00%. Shonubi believes that such assertive action would act as a powerful signal to the markets and set the stage for price stability, a crucial precondition for sustainable long-term growth.

Aishah N. Ahmad argued for an aggressive approach to inflation control, advocating for a rate hike to 19.00%.

Her stance is driven by the belief that double-digit inflation rates erode real incomes and exacerbate poverty.

Ahmad’s vote suggests that she sees the Central Bank’s primary mission as combating inflation and that more drastic measures are needed to re-anchor market expectations effectively.

Both members emphasized the immediate need for action, even if it means taking bolder steps that could have other economic implications.

Alternatives to MPR Increase

Aliyu Ahmed, who pointed out that the monetary policy rate had been raised by 700 basis points since May 2022, pushed for tackling inflation from the supply side chiding the government to do more on the Fiscal Side.

“I am keen to see that inflation is aggressively tackled from the supply side also, by addressing structural deficiencies that cause food and core inflation to rise.”

He voted to keep the MPR at its current level while exploring other liquidity-mopping tools.

Nuanced Approach

Kingsley I. Obiora, another committee member, chose a nuanced middle ground that seems to encapsulate the complex factors at play. Obiora voted to incrementally raise the MPR from 18.5% to 18.75%.

“In the face of high inflation, negative real interest rates, and the need to re-anchor inflation expectations, a moderate increase is prudent,” he said.
Obiora went on to explain his perspective, saying, “This stance, in my view, will contain inflationary pressures in the short- to medium-term while sustaining growth recovery and safeguarding financial system stability.”

His measured approach appears to seek a balance, aiming not to stifle growth or shake financial stability while still signalling a commitment to combat inflation.

Obiora also suggested that the small rate hike could be a ‘temperature check’ of sorts. “It allows us to gauge the economy’s responsiveness to rate changes without causing the kind of shock that a larger increase might incur,” he elaborated.

Market Implications and Future Outlook

The MPC eventually resolved by a majority vote to raise the MPR. Six members voted in favour of a hike: four members suggested a 25 basis points increase, while two pushed for a 50-basis points hike. Five members opted to keep the MPR constant.

This reveals the complexity and urgency of the inflation issue and the lack of a one-size-fits-all solution.

The mixed opinions within the MPC indicate how multi-faceted the issue is. As the Central Bank prepares for its next meeting, it faces an increasingly difficult task of balancing inflation control with economic growth and stability, particularly as inflation continues to tick upward.

The calls for closer coordination between monetary and fiscal policy are likely to intensify, especially if the MPR hikes fail to curb inflation effectively.