Business News

Incessant Interest Rate Hike Affecting Private Sector—NECA, CPPE

interest rate hike

By Adedapo Adesanya

The Nigeria Employers’ Consultative Association (NECA) and the Centre for the Promotion of Private Enterprise (CPPE) have raised concerns about the successive increase in the Monetary Policy Rate (MPR) by the Central Bank, saying it will continue to hurt investment decisions in the private sector.

The groups separately expressed concerns about the interest rate hike at the end of the MPC’s 295th meeting on Tuesday in Abuja, where 1.50 per cent was added to the previous MPR of 24.75 per cent, which now stands at 26.25 per cent. In 2024, the central bank has jacked up the cost of borrowing by 750 basis points (7.50 per cent).

The committee also retained the asymmetric corridor around the MPR to +100/-300 basis points and retained the cash reserve ratio of Deposit Money Banks at 45 per cent.

NECA’s Director-General, Mr Adewale-Smatt Oyerinde, in a statement on Tuesday, said that the cost of borrowing for investment by organised businesses had increased since March 2024 when the policy rate was raised to 24.75 per cent.

According to him, the new policy rate of 26.25 per cent will further affect private investment negatively.

“It is implausible to control the current high inflation by continuously raising interest rates.

“Implementing tight monetary policy stance when firms’ investment expenditure and household consumption is at the lowest ebb may further incapacitate production and capacity utilisation in the already challenged private sector,” he said.

The NECA boss said that the persistent high depreciation in the value of the Naira would continue to feed inflation while constraining firms’ investment and household consumption.

He said, consequently, raising the policy rate would further exacerbate inflationary pressure as growth in factor costs and commodity prices become unbounded.

Mr Oyerinde attributed the defying inflationary pressure to the liberalisation of FX in the country, notwithstanding that the economy was heavily import-dependent.

He said that before the total floating FX regime was implemented, the economy was better off with inflation anchoring below the 20 per cent mark.

“Consequently, I urge the government to reconsider the guided FX floating regime, which is a dynamic and flexible FX management regime and has proven to be better than the current regime,” Mr Oyerinde added.

On his part, Mr Muda Yusuf, Chief Executive Officer (CEO) of CPPE, while responding to the outcome of the MPC meeting, said that the rate hike might have a negative impact on the real sector and investments, leading to increased hardship for businesses.

“We have seen yet a further tightening of monetary conditions in the economy. My prayer was for the MPC to pause the rate hikes for a number of reasons.

“First, previous rate hikes have been quite aggressive, hurting output and real sector investments. Most economic operators with credit exposures to the banks have not recovered from previous hikes.

“Interest rates were already around the 30 per cent threshold. Secondly, the extant CRR of 45 per cent has profound liquidity effects on the financial system.

“Both measures have dampening effects on financial intermediation, which is the primary role of banks in an economy.

“Thirdly, the monetary policy transmission channels are still very weak, given the level of financial inclusion in the economy. This limits the prospects of monetary policy effectiveness,” he said.

According to him, the new rate hike is an additional cross to be borne by investors who have exposures to bank credit facilities.

“Naturally, a rigid monetarist disposition by the central bank is expected. But we need to reckon with the costs to the economy.

“Hopefully, with the positive outlook for domestic refining of petroleum products, we may begin to see a moderation in energy cost and a pass-through effect on the general price level.

“This is one silver lining that is on the horizon at the moment.

“Necessary fiscal policy support is urgently needed to compensate for the adverse impact of extreme monetarism on the economy,” Mr Yusuf said.