INFLATION: WHY THE CBN's MONETARY POLICY RATE MAY PROVE INEFFECTIVE

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Photo Source: SDPB Radio

I am sometimes appalled by the decisions of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) which consists of the Bank's governor (at the moment, Godwin Emefiele), his deputies, and other appointed members, with regards to the Monetary Policy Rate (MPR).

I agree to a limited extent that inflation has its linked to money supply, but not in all instances, as there are varying sources of inflation, and taking a critical evaluation of the perculiarity of a country's situation should inform any policy choice.

Last week, the CBN's MPC increased the short-term interest rate by a 100 basis point as a response to the continuous increase in inflation, which in my opinion, such response is nothing but a deflection. Recall that two months ago, the CBN increased MPR by 150 basis points from 11.5% to 13% when inflation was 17.71%. One would have thought that such increase would yield results by addressing the inflation crisis that we were faced with, but it obviously failed, as inflation rose to 18.6% in the month of June (year-on-year).

Does it then make sense for the CBN to raise interest rate to 14%? In my view, absolutely not. In other climes, such as the United States and Europe, increasing interest rate may seemingly be effective, as the economies are credit driven. People borrow money through credit card providers to meet personal consumption needs. Hence, increasing interest rate may effectively lower borrowings and ultimately, unnecessary consumption, which potentially would help achieve the desired results of the monetary authority of reducing inflation rate and inflation expectations.
 
However, the inflation we are faced with in Nigeria is not driven by consumer demand or excess money supply. In fact, people don't borrow from the financial services providers in Nigeria to meet consumption needs, but from their personal income, which renders the the increase of the MPR less effective at this point in time. I understand the investment part of this, and by no means will I fail to recognise why some persons may argue otherwise. Read my blog post of two years ago. I have provided an exposition on that.

Nigeria's inflation is rather structural than consumerist. The pervasive level of insecurity in the North and some parts of the South East has significantly contributed to the upsurge in food inflation, and food inflation is the major driver of the headline inflation, which is currently at 18.6%, from the data provided by the National Bureau of Statistics (NBS). This is further exacerbated by the rise in energy cost which is a major input the production cost function of many businesses in Nigeria due to the epileptic supply of power, which has sadly become normalized.

Photo Source: Africa Facts Zone

As at June 2021, the price of diesel was reportedly sold at the price of 242.43 Naira per litre, but as at June 2022, the price of diesel was reported to be sold at the rate of 733.78 per litre (Source:NBS). When this increase is factored into production, alongside other costs that businesses would have to incur to meet their production capacity, we are bound to see an upshoot in prices. This is not because there is an increase in money supply or the demand by consumers has risen overnight, rather it is simply the consequence of a system failure. Hence, making the the use MPR as a tool to address inflation in the country ineffective.

An increase in the MPR would induce the increase in the prime lending rate, which has consequences on the refinancing of business loans. This cost would be passed on to the pricing of the products or services. Worse enough, if the product or service has demand inelasticity, the consumers would have no option but to bear the brunt of such increase, given that personal income and wages have remained static overtime, and the people feel poorer today than they were yesterday.

This action by the CBN to increase interest rate would in no doubt lead to the continuous uptrend in inflation rather than lower it, not because of increased demand for consumer goods but because of the cost that are either imported through energy (fuel, gas and diesel) prices or generated within, due to the failure of the government to address security issues in the country.

Photo Source: Vanguard Nigeria

What is the way forward? Should we use a tuberculosis drug to abate headache? You sure know the answer.

I am compelled by an inexorable logic that the fiscal dimension of the government is not effectively utilize. Addressing the issue of energy pricing and security crisis would yield the results of lowered inflationary pressure that we desire, even though this may not happen suddenly because of the structural complications. It however would remain worse if no deliberate effort is targeted at tackling some of these problems from the executive arm of government.

Although, at the moment, I strongly feel the body language of the government of today does not show any interest in fixing the problems. Efforts are only geared towards winning the next elections, while more people are thrown into absolute poverty daily to languish in hunger, without hope of the next meal.

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