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CBN And The Imperative Of Taming Inflation

Nasir Dambatta


“Americans are fed up practically everywhere they spend money. Gas prices sit near record highs, food costs are surging, and housing is getting more expensive by the month. Lawmakers — particularly Republicans — have lambasted the Federal Reserve for allowing inflation to hit 41-year highs, arguing the central bank should’ve started raising interest rates much earlier. Inflation is all over the world now” – BUSINESS INSIDER


By Nasir Dambatta

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), at its meeting in Lagos, Tuesday, 2nd August, 2022, announced hiking the benchmark interest rate to 14 percent (MPR) in a deliberate effort at taming the growing inflation that is capable of stunting the country’s economic growth.

Although mindful of whatever impact the decision could have on the manufacturing sector, another critical determinant of economic growth, CBN felt it had to do so in the manner of chosing the lesser between two evils – weakening the manufacturing sector of the economy with high interests on loanable funds; and ignoring the spiralling inflation that gnaws fast at the country’s savings.

CBN, drawing lessons from global trends and experiences of advanced and developing economies, readily had to choose contending with weakening the manufacturing sector than allowing the growing and rippling impact of inflation to weaken the economy to the extent that even the manufacturing sector itself gets plunged into a worse crisis than if the MPR had not been raised.

CBN believed that whatever discomfort the manufacturing sector would experience sequel to the decision is a ‘lesser evil’, and whatever crisis it would have on the economy could be much more manageable, than if inflation had been allowed to rampage across all sectors of the economy.

While announcing the 14 percent interest rate hike at the post-MPC briefing, CBN Governor, Godwin Emefiele, argued that the decision was aimed at taming inflation to ensure that it does not retard economic growth. He admitted that the MPC did not lose sight of the fact that the interest rates hike could impair manufacturing output, but it, it was also convinced that the impact of the growing inflation on the country’s savings and, thus, the entire economy is far graver and weightier than any impairment of the manufacturing output.

“Like you all have noticed, globally since the beginning of the year, there has been heightened level of inflation. To the extent that today we see even in developed economies, the fact that even as a result of rising inflation, supply chain problems and the rest of them, even most of those developed economies are already facing a threat of recession,” Emefiele said.

He cited the instance of the United States noting that with inflation in that advanced country growing from 2.5 per cent in 2020 to 9.1 per cent, according to latest data, the Federal Reserve has had to hike rates four times this year alone.

The CBN Governor cited two African instances, saying, “In Egypt, they have increased their rates three times this year because in 2020, the inflation rate was 7.3 per cent and today it is 13.2 per cent. Ghana has increased rate three times this year; inflation (Ghana’s) has moved up from 7.8 per cent in 2020 to 29 almost 30 per cen today.”

Emefiele observed that some of the world’s advanced economies, like the United States and the European Union (EU) have suffered monumental declines in their output.

He cited the instance of the United States recording a negative output in the first quarter of 2022, expressing the fear that if the world’s biggest economy records a second decline in output in the second quarter of 2022, it would have plunged into recession, a development that could have grave impact on the global economy.

The CBN Governor noted that the leaping inflation and its impact on growth has constituted such a grave concern globally currently that the MPC wasted no time in considering the options of holding or reducing the MPR during their meeting.

Emefie maintainedd: “It (surging inflation) is a very serious matter that MPC members take very seriously, because what you find is that as inflation continues to trend aggressively higher, it would no doubt begin to adversely retard growth in any economy.

“And that is why, like you may have observed, most of the countries of the world, both developed and developing economies, have had to embark on very aggressive rate increases so as to dampen the effects of inflation.”

He reviewed efforts at tackling inflation in Nigeria, saying, “What we have done in our own attempt to pursue a policy of price stability that is conducive to growth, we have tried over the past couple of (MPC) meetings to leave rates the way they are, while at the same time, we have been pushing hard on how to improve on output growth.

“But, of course, with the aggressive acceleration of inflation rate in Nigeria, we decided in May, after almost about two and half years, to raise rates by 150 basis points.”

The CBN Governor disclosed the growth of inflation over the last two years: “In 2020, Nigeria’s inflation was 12.13 per cent, today, the last data released a few days ago puts inflation at 18.6 per cent. MPC members feel that we cannot just hold rates, we cannot just continue to watch inflation grow the way it is rising; that something must be done to rein in inflation.

“We conducted a very serious analysis, looking at the various data that were presented to us at this meeting and we felt that there is a need to rein in inflation, not just because we want to look at what other economies are doing but also because we need to do a lot more work on inflation. And that is the reason MPC did not even take any look at whether to hold rates constant or to loosen.”

Emefie said although members of MPC were aware that some analysts had not expected the committee to tighten at a second consecutive meeting due to the fact that the decision would raise cost of borrowing and impair manufacturing output, the committee would continue to tighten with any further surge in inflation.

He noted: “The important thing is that as long as we see inflation at the level that can retard growth, it must be dealt with, while at the same, we are looking at how do we use developmental finance tools to push towards improved output growth. That is what we are doing, and at the same time I want to signal that the MPC is very determined that if inflation continues at this rate, particularly aggressively, we would continue to tighten.”

The CBN Governor assuaged public fears on about inflation, saying that the apex bank would continue to explore every feasible measures to moderate inflation, expressing the hope that food prices will drop during this year’s harvest season. He could not, however, promise that MPC will stop raising rates if inflation rages further.

As expected, the CBN’s rates hike immediately incurred the wrath of the Manufacturers Association of Nigeria (MAN)

MAN’s Director- General, Segun Ajayi-Kadir, in a statement, described the hike as anti-manufacturing considering the serious challenges the manufacturing sector has already been trying to surmount.

“This is another level of increase in interest rates on loanable funds, which will no doubt upscale the intensity of the crowding out effect on the private sector businesses as firms have lesser access to funds in the credit market.

“It will spur upward review of existing lending rates, which will drive costs northward, intensify demand crunch, increase cost of manufacturing, exacerbate the intensity of idle capital assets and reduce capacity utilisation.”

The MAN helmsman urged: “the MPC must, in future adjustments of MPR, take into consideration the trend of core inflation rather than basing decision on headline and food inflation.”

Expectedly, analysts at CSL Research reacted to MPC’s rates hike, cautioning that a incessant rates hikes could stunt the country’s economic growth.

They said in a statement: “With the current narrative on inflation, the committee (MPC) was of the view that neither holding nor loosening the policy parameters was an option, given the impact of the rising inflationary pressures, which may begin to erode the moderate gains achieved in improving consumer purchasing power.”

They kicked: “We retain our view that a continuous hike in rate will likely constrain the country’s fragile growth while achieving very little in terms of combating inflation and attracting foreign inflows.”

Also reacting, an economist, Dr. Muda Yusuf, described the MPC’s MPR hike as “unexpected, but not desirable,” maintaining that although the MPC’s decision was in accordance with the policy tightening trend by central banks across the world, it did not consider Nigeria’s domestic peculiarities.

“The new MPR hike means that the cost of credit to the few beneficiaries of the bank credits and manufacturers that cannot access the CBN windows will increase, which will impact their operating costs, prices of their products and profit margins,” Dr. Yusuf observed, stating, “The equities market may be adversely impacted by the hike.”

He expressed doubt on the efficacy of the rate on stemming inflation in Nigeria, considering the fact that “key drivers of Nigeria’s inflation are supply side variables, not demand driven,” recalling, “The previous hike in policy rate of 150 basis point in May did not have any significant impact on the inflation numbers. If anything, the general price level became even more elevated.”

Notwithstanding the doubts expressed by analysts, industry operators, considering the fact that most central banks across the world are applying their respective measures at taming inflation, readily approved the CBN’s interest rates hike to combat inflation that gnaws fast at the country’s savings.

Dambatta, a veteran journalist writes via



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