By Melvin Onwubuke
There are concerns by some financial experts, regarding the aggressive monetary policy stance adopted by the Central Bank of Nigeria, which recently led to another increase in the interest rate by 22.75%.
These experts pointed out the potential domino effects of the heightened MPR on existing bank loans, according to nairametrics.
They highlighted, this could force banks to adjust their loan pricing, which might lead to a worsening of the level of non performing loans and putting pressure on financial stability indicators.
According to Mike Eze, the Managing Director of Crane Securities Limited, the banking sector may experience positive results in the short term as a result of higher interest rates, resulting in windfall profits for certain institutions.
Nevertheless, he warned that in the future many businesses may have difficulty meeting their loan obligations and this could lead to an increase of non performing loans.
Mr. Eze elaborated on the Central Bank of Nigeria’s repeated commitment to maintaining a aggressive monetary stance as part of its strategy to combat inflation.
However, he expressed doubt as to whether this approach would be effective in dealing with the underlying causes of inflation.
Among the factors he highlighted as driving inflation were insecurity affecting food production, currency depreciation, and escalating costs associated with importing energy inputs.
He stressed that, while the Central Bank may choose to use an increase in interest rates as a preferred tool for dealing with inflation, it will not be able to sufficiently deal with underlying problems contributing to increased price pressures.
He said there is a need to recognize, the current strategy may not fully resolve the inflationary challenges, particularly if the root causes are not directly tackled.
Professor Uche Uwaleke, Nigerian First Professor of Capital Market and the Director of the Institute of Capital Market Studies at the Nasarawa State University Keffi said jerking up the MPR by 400 basis points in one fell swoop is simply an excessive.
Uwaleke noted “With the CRR now set at 45%, a substantial portion of deposits is effectively locked up, leaving banks with limited resources for lending.
“This poses challenges for access to credit, increases the cost of capital for firms, raises the cost of debt service for the government, and affects the asset quality of banks.”
Uwaleke pointed out that the expected consequences would include banks adjusting their loan pricing, which could exacerbate the level of bad loans and strain financial stability indicators.
He said “The overarching objective of curbing inflation, driven by both monetary and non-monetary factors, may inadvertently lead to economic contraction.
“This could manifest in lower GDP figures, particularly in the agricultural and industrial sectors, and have ripple effects across the stock market and employment levels.”
Recall, the Central Bank of Nigeria recently implemented a substantial increase in the monetary policy rate (MPR), raising it by 400 basis points to a historic 22.75%.
