MONEY MARKET: Dangers of over-tightening amid SVB lessons

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The Monetary Policy Committee (MPC) raised the benchmark interest rate from its second meeting of the year, as anticipated, by 50 basis points to 18%, making it the fifth highest in Africa.

Following the example of Zimbabwe, Ghana, Sudan, and Sierra Leone, whose respective interest rates are 150, 28, 27.3, and 18.25 percent, Nigeria’s benchmark interest rate of 18 percent, which is the same as Malawi’s, is set at 18 percent. In response to the MPC’s easing of its aggressive tightening stance, the nation moved into this position.

Since last year, the MPC has steadily increased interest rates to combat the inflation tide, resulting in a total of 650 basis points in consecutive rate increases. In order to control rising inflation, it voted to maintain a contractionary monetary policy at the conclusion of its 290th meeting.

Due to the ongoing discussion about the removal of fuel subsidies and the ongoing scarcity of PMS, which the committee expects to occur by the end of the current administration’s term, price pressure is expected to persist. It also took into account the dangers of financial contagion from the current banking crises in Switzerland and the US, which have already affected Silver Valley Bank (SVB) and four other banks.

Godwin Emefiele, the governor of the Central Bank of Nigeria, assured that the Nigerian banking sector is not currently being directly impacted, but the MPC emphasized that it had looked into how further policy rate increases would affect the stability of the banking system.

The committee had stated that it had looked at the impact of further policy rate hikes on the stability of the banking system, taking into account the recent cases of bank failure in the United States and Switzerland. However, even though the persistent headwinds to headline inflation provide a compelling argument for an upward adjustment to the key policy rate, even if slowly, the committee had highlighted that it had done so.

The committee requested that the CBN strengthen its regulatory oversight of the banking system because it was confident that further rate increases wouldn’t have a negative impact on the stability of the Nigerian banking system. This is done to make sure that the banking sector remains resilient and stable.

Analysts believe that further tightening could stymie economic expansion by further hurting already struggling businesses with higher interest rates. Based on the CBN’s optimistic outlook for continued growth in the services and agricultural sectors, members of the MPC forecast that Nigeria’s GDP will grow by about 3.03 percent.

In order to achieve sustainable economic growth and price stability, analysts at Cowry Asset Management believe that the 50 basis point increase in the policy rate, which was implemented as a tool to combat accelerating inflation, may cause slower growth and further contraction of the total money supply.

“However, rising inflation has persisted as a top concern in most economies around the world, including Nigeria, and is pushing price stability plans out of the monetary authority’s control—an economic growth trade-off that could further drive the central bank’s position for an extended contractionary stance.

The aggressive monetary policy tightening measures of the central bank will largely depend on the path of inflation, as Cowry Assets analysts noted. “Similarly, we continue to see the downside risks of pressures from inflation.”

In their analysis of the MPC’s decision, analysts at Cordros Research noted that since the SVB’s failure, there has been a significant change in market expectations. According to consensus, the key policy rate will be raised by 25 basis points at each of the policy meetings in March and May, after which the Fed is expected to take a hold stance at future meetings.

Furthermore, despite the recent difficulties, we believe that if the US Fed abruptly stops raising the Fed rate to bring inflation back to the target, it could harm the credibility of its forward guidance and cause inflation to rise. Due to the aforementioned, rates may rise from their current level in the future. We therefore tend to agree with the expectations of the current market.

These expectations, in our opinion, will positively influence future monetary policy decisions made by the CBN. In spite of the favorable base effects, consumer prices in the domestic economy are predicted to stay sticky. Furthermore, the outlook for near-term growth is still hampered by elevated downside risks that are made worse by the CBN’s Naira redesign drive’s unintended consequences, which include rising production costs.

“Based on the overall picture, we believe the MPC is likely to maintain a slower rate hike at its next policy meeting, especially given that the end of rate hikes by systemic global central banks is in sight amid sticky domestic inflation. The CBN governor did in fact warn against continuing with an aggressive tightening during the post-MPC conference. In light of the risks associated with over-tightening, he declared that the MPC will move forward with a strategy of smaller rate increases to reduce the gap between real returns that are positive and those that are negative.

It was advised by analysts at Afrinvest West Africa that the CBN reconsider its approach to the anchoring of inflation expectations, which served as justification for yet another interest rate increase.

According to them, if the overall goal is to curb monetary-induced inflation, then financing conditions should do the same (however treasury bills rate have remained well below both the MPR and inflation rate). In addition, the bank’s policies, such as its cashless program, should be implemented to support its goal of price stability, while fiscal interventions and FG overdraft financing should be reviewed in light of the circumstances of the day.

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