Inflation: CBN should resist the temptation of further interest rate hike, says CPPE

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The Director, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, has urged the Central Bank of Nigeria (CBN) to resist the temptation of further hike in its interest rate also called monetary policy rate (MPR).

He stated this while reacting to the National Bureau of Statistics (NBS) report on headline inflation which accelerated to 21.47per cent in November as against 21.09 per cent in October. 

He further advised the CBN to suspend the deployment of monetary tightening tools.

Yusuf said, “The Nigerian economy is not a credit-driven economy which is why the tightening outcomes have been inconsequential as a tool to tame inflation.  

As of October 2022, credit to the private sector as a percentage of GDP was 22.7 per cent in Nigeria. The percentages for other countries in 2020 according to the world bank were 32 per cent in Kenya; 96 per cent in Morocco; 193 per cent in Japan; 143 per cent in UK; 216 per cent in the United States; and 39% average for sub-Sahara Africa. This underscores the need for variabilities in policy responses. 

Inflation had been spiking despite the serial monetary tightening. 

Sustained tightening penalizes entrepreneurs [especially the real sector], and increases the cost of credit with heightened prospects of a backlash on growth.  Inflation restraining strategies should accordingly focus on productivity-boosting supply-side factors and reduction in ways and means funding of deficit”.

Yusuf noted that over the last year, the Nigeria inflation story has been a depressing one as reflected in the dynamics of all key price metrics.  

He said the key inflation drivers have not changed over the last few years which according to him include the depreciating exchange rate, rising transportation costs,  logistics challenges,   forex market illiquidity, hike in diesel cost,  climate change,  insecurity ravaging farming communities and structural constraints to economic activities.

Yusuf added that fiscal deficit financing by the CBN is also a significant factor fueling inflation through high liquidity injection into the economy.

“Tapering of monetary easing in the advanced economies is also driving imported inflation and the depreciation in the exchange rate. Consequences of soaring inflation include the following: Erosion of purchasing power of citizens as real incomes collapse, mounting poverty, escalation of production costs which negatively impact profitability, shrinking shareholder value in many businesses, waning of investors’ confidence, and dwindling manufacturing capacity utilization.

Taming inflation demands urgent government intervention to fix supply-side constraints in the economy.  Tackling production and productivity constraints, fixing the dysfunctional forex policy, and reducing liquidity injection through ways and means funding of fiscal deficit,” he said.

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