Nigeria is flirting with economic disaster, as an investable interest rate hike will further dampen economic growth that is already at 2.80 percent, the lowest in a decade.
This is because the Central Bank of Nigeria (CBN), in its next MPC meeting, will be in an unavoidable dilemma as to whether to increase the MPR in order to curb rising inflation and prevent a further haemorrhaging of a reserve hard hit by a significant drop in oil price or let the status quo remain.
If the apex bank increases the interest rate, it means more businesses cannot access loans at cheaper cost. Also, the cost of accessing loans would be higher and cost of doing business would spiral.
Consequently, people will be discouraged to open new businesses and employ more people. And when jobs are not created, unemployment rate will be high.
High interest rates discourage additional spending, which doesn’t give the economy the necessary boost in times of slow economic growth.
The Abuja based bank had in March increased the MPR by 100 basis point to 12 percent from 11 percent.
Inflation has risen to 13.80 percent in April from 12.80 percent in March, fuelled by increase in gasoline and electricity prices.
We believe if rates are increased it will exacerbate the already anaemic position of manufacturers who are grappling with the restrictions imposed by the Central Bank.
“In terms with our discussion with central bank, they are more concerned with curbing inflation trajectory, rather than address economic growth. So, yes they are likely to continue hiking despite the fact that growth is weakening,” said Yvonne Mhango, sub-Saharan African economist at Renaissance Capital.
“On the impact it will have on the economy, naturally it is negative, if you look at the transmission mechanism and impact on credit growth and GDP contracting. Their biggest concern is that if inflation gets out of hand, then you are also eroding incomes in the economy. So in a way, the consumer and growth is impacted. But they have chosen to go the path of containing inflation rate hikes,” said Mhango.