KPMG, a global audit, tax and advisory services company, has posited that the recent decision by the Central Bank of Nigeria (CBN) to raise the Monetary Policy Rate (MPR) to 24.75 per cent, could help attract more portfolio investments.
However, the firm, in its report tagged: “CBN’s Monetary Tightening: The Trade-off Dilemma”, stated that the decision although a step in the right direction, was not enough to tackle the country’s inflation.
Recall that the Monetary Policy Committee (MPC) of the CBN raised the bank’s MPR to 24.75 per cent in March 2024, bringing it to its two-decades highest and representing a 200 basis points (bps) increase from the previous 22.75 per cent set in February 2024.
Also, the CBN narrowed the asymmetric corridor to +100/300bps around the MPR in its March meeting after initially widening it to +100/-700bps around the MPR.
Furthermore, the committee left both the Liquidity Ratio and the Cash Reserve Ratio (CRR) unchanged at 30 per cent and 45 per cent, respectively. For merchant banks, however, the CRR was raised from 10 per cent to 14 per cent.
Despite these upward adjustments, inflation remained elevated reaching 31.7 per cent in February 2024.
This necessitated the more aggressive response of the apex bank to address inflationary pressures.
These moves, KPMG said, are not only consistent with market expectations, but also reaffirm the independence of the CBN in its conduct of monetary policy, but noted that the CBN needs to guard against the negative impact of the decision.
“We expect the higher MPR to attract greater FX inflows that would drive the appreciation of the Naira in the foreign exchange market. Most of these gains are expected to come from portfolio investments with the risks of sharp reversals when market signals change.
“However, there are risks of inadvertent growth slowdown associated with the policy. With the real sector already burdened by high borrowing costs and inflation, the CBN’s decision could further shrink the sector by disincentivising investments.
“This may adversely affect employment and growth levels. Furthermore, the policy may also give rise to higher non-performing loans. The next few months will be important for assessing the impact of the CBN’s monetary tightening on inflation,” it added.
Statistically, KPMG noted that inflation is set to lose steam after mid-year, largely because of the onset of base effect, except economic policies that significantly pressure prices are implemented by the federal government.
“Attributing a decrease in inflation solely to the tightening of liquidity once the base effect kicks in after mid-year might be inaccurate,” the consulting firm added.
Addressing Nigeria’s supply-side bottlenecks, it posited, is crucial for taming its cost-push inflation, adding that unless the challenges are sustainably addressed, inflation may yield little to monetary tightening.
“The downside of this “hot money” inflow, however, is the risk of sharp reversals in response to changes in market signals. Large scale capital reversals are historically known to birth macroeconomic instability.
“Furthermore, we note that targeting inflation from the demand-side (via a sustained monetary tightening of such scale) may inadvertently cause Nigeria to trade-off some growth for lower inflation.
“This is especially worrying as the nation’s growth has been slow, fragile, and decelerating (3.4 per cent in 2021, 3.1 per cent in 2022 and 2.74 per cent in 2023) in recent times. With the real sector already burdened by high borrowing costs and inflation, the CBN’s decision could further shrink the sector by disincentivising investments.
“The higher borrowing costs may induce a scale back on investments in the real sector, adversely affecting employment and growth levels. Also, monetary tightening of such scale may give rise to higher non-performing loans.
“The higher interest rate environment may strain borrowers’ finances and raise their risk of defaulting on loans,” it added.
These decisions, the firm stressed, restrict the ability of banks to channel credit to support the economy’s ambitious growth drive.
Thus, KPMG added that the restrictive monetary policy environment further casts shadows on the attainability of the government’s economic objective. Besides, it posited that there have been concerns that inflation has remained elevated despite previous policy rate hikes. “This is because Nigeria’s inflation is largely due to supply-side factors driving cost-push inflation,” it argued. (ThisDayLive)
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