Analysts have applauded the decision of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to raise the Monetary Policy Rate (MPR) by 100bps to 17.5 per cent, stressing that it is steered towards taming inflation.
However, the analysts in separate reports cautioned that continuous increases would reduce lending because customers would be reluctant to borrow and pay back with high-interest rates.
The MPC retained the asymmetric corridor of +100/-700 basis points around the MPR, Cash Reserve Ratio at 32.5 per cent, and liquidity Ratio at 30.0 per cent.
According to analysts at Afrinvest, the increase in monetary policy rates should have ultimately affected interest rates on deposits, "but the increase, which should convert to high rates on loans has met some resistance from some banks.
"In our view, the decision to tighten the rate at the year's maiden meeting is an appropriate response to early but tentative signs of moderating inflation rate. In our previous note, we stressed that the December headline print was driven by a high base effect since m/m headline inflation registered a 4-month high of 1.7 per cent. While we expect continued soft moderation in inflation, especially in Q1, we believe that the underlying factors affecting consumer prices would persist.
"Also, we opine that a change in domestic policy direction ahead of globally systemic central banks could be inimical to the central bank's goals of improving offshore capital inflows as well as stabilizing the Naira. That said we are concerned that without adjusting other key parameters the MPR continues to serve a mere signaling effect as financing condition appears to stay accommodative. Our analysis of lending rates data for 2022 shows that the prime lending rate closed the year at a discount of 265bps to the MPR while the maximum lending rate (excluding the unavailable February data) averaged 27.8 per cent in 2022 against 28.1 per cent in the prior year, despite the aggressive series of hikes."
Sign up for free AllAfrica Newsletters
Get the latest in African news delivered straight to your inbox
Commenting on the effect MPR is having on the availability of loans to boost the real sector, the Head, Financial Institutions Ratings at Agusto & Co, Mr. Ayokunle Olubunmi, said: "The increase in MPR, most banks are seeing it as a signal from the CBN that they should increase rates. So, what you see is that a lot of banks are increasing the interest rates on their loans. But now most banks have gotten to a stage where there is a limit to increasing the rates on loans because it could lead to default.
"A lot of banks are now reluctant on the rate they are increasing their interest rates. So, most banks can't pass the impact of the high MPR. We would see that the earnings of banks, would actually reduce because don't forget that banks primarily get their money from the difference between the interest income and interest expense."
On their part, analysts at Cowry Assets stated: "We continue to see the downside risks to pressures from inflation as the central bank's aggressive monetary policy tightening measures will largely depend on the path of inflation. In our December 2022 inflation statements, we noted that the moderate reversal in inflation would prompt members into voting for a further tightening stance to keep inflation at single-digit. Having said that, we would note that loosening under a double-digit inflationary condition would be tantamount to the immediate reversal of the expected further downward trend in inflation."
