Interest rate hike: Labour, OPS project higher inflation, weaker naira

The labour movement and the Organised Private Sector have projected higher inflation and a weaker naira following the latest hike in the country’s interest rate to 27.50 per cent by the Central Bank of Nigeria.

Both groups spoke on Tuesday while reacting to the increase in the Monetary Policy Rate by CBN, as the Governor of the apex bank, Olayemi Cardoso, insisted that the country would begin to see the effects of the current monetary policies by the first quarter of 2025.

CBN raised NIgeria’s interest rate by 25 basis points to 27.50 per cent in November from 27.25 per cent in September 2024.

Cardoso disclosed this during a press briefing on Tuesday after the 298th MPC meeting in Abuja.

“The committee was unanimous in its agreement to raise the monetary policy rate by 25 basis points to 27.50 percent,” he said.

Cardoso noted that the decision to raise the country’s MPR is to tackle inflation, which stood at 33.87 per cent in October 2024.

He also announced that the Cash Reserve Ratio was retained at 50 basis points, from 45 per cent to 50 per cent for deposit money banks and from 14 per cent to 16 per cent for merchant banks.

Also, the committee retains the liquidity ratio at 30 per cent and the asymmetric corridor at +500/-100 basis points around the MPR. Similarly, the committee retained all other monetary policy decisions.

Labour kicks

A senior official of the Nigeria Labour Congress decried the MPR hike, stressing that it would cause a significant increase in the cost of borrowing from commercial banks.

“This decision, intended as a tool to combat inflation, is expected to have profound implications for the economy, particularly on production and investment,” the official who spoke in confidence due to lack of authorisation to speak on the matter, stated.

He warned that this move could exacerbate production challenges, as manufacturers face higher costs of financing their operations.

The NLC official stated that Nigeria’s inflation, largely driven by structural factors such as energy costs and exchange rate instability, may not significantly ease with a higher MPR.

He further highlighted that the country’s inflation is primarily cost-push, rooted in elevated production expenses rather than excessive money supply.

“This hike will amplify the cost of funds for manufacturers, pushing production costs higher. In a country where energy prices and raw material imports are already expensive, this policy risks making goods unaffordable and increasing consumer resistance,” he noted.

He emphasised that higher borrowing costs are expected to reduce investment, further straining businesses struggling with inventory buildup due to declining demand.

He mentioned that many companies were already grappling with high operating expenses, and the new policy could lead to more closures and layoffs, compounding unemployment woes.

The NLC official argued that the CBN’s approach may not address the underlying causes of inflation.

“Our inflation is cost-driven, not demand-driven. Raising the MPR only tightens the economy further. What we need is cheaper energy, stable exchange rates, and accessible credit for producers,” he emphasised.

He asserted that there is also skepticism about the policy’s ability to attract savings. While banks may raise deposit rates, the gap between borrowing and savings rates remains significant, discouraging deposits and prompting savers to seek alternative investment options.

According to him, manufacturers and trade associations have raised alarms about the ripple effects of this decision.

He stated that the Manufacturing Association of Nigeria has called for policies that prioritise affordable credit and improved infrastructure to reduce production costs.

“As Nigeria grapples with these economic challenges, the call for context-specific, sustainable economic policies continues to grow louder, emphasizing the need to balance inflation control with economic growth,” he noted.

OPS reacts

Also, the Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, said, “The Monetary Policy Committee’s continued hawkish stance has sparked concerns as Nigeria’s third-quarter GDP report highlights declining growth in critical sectors.

“While the financial services sector grew by 32 per cent, agriculture and manufacturing recorded modest growth rates of 1.14 per cent and 0.92 per cent, respectively, with real estate, air transport, and textiles remaining in recession.”

Yusuf criticised the disconnect between the financial sector and the real economy, warning that further monetary tightening could worsen the situation.

“Key sectors like agriculture, manufacturing, and real estate are struggling and need monetary and fiscal support, not more restrictive policies,” Yusuf stated.

He called on the Central Bank of Nigeria to enhance support for development finance institutions to mitigate the financing challenges created by its tight monetary policy regime.

Yusuf explained that the MPC’s actions, aimed at controlling inflation, risk deepening financing constraints in productive sectors, slowing economic recovery and job creation.

He canvassed for a coordinated fiscal and monetary approach to stimulate growth in struggling sectors while addressing structural economic issues.

“The growing calls for policy recalibration reflect mounting concerns over Nigeria’s fragile economic recovery and the need for inclusive growth strategies,” Yusuf noted.

Reacting to the development, the National President of the Association of Small Business Owners of Nigeria, Dr Femi Egbesola, said the concurrent increase in the Monetary Policy Rate would continue to increase the borrowing cost for businesses and individuals, adding that this would no doubt lead to more non-performing loans, loan defaults, and bad loans.

He said, “It will continue to hamper business growth and also shrink the economy, such that it will push inflation higher, reduce consumer spending, and ultimately lead to low profitability for businesses and eventual job losses for workers.

“The challenge of inflation in Nigeria is not just a monetary problem. Other problems such as corruption and mismanagement in the fiscal sector are also causing inflation. So a raise in MPR may just not be the only and best approach to arrest inflation.

“It is becoming increasingly important to find a way to support the challenged MSMEs who account for 96 percent of business and provide more than 80 per cent employment. Aggressive rate hikes cause harm to the MSMEs and the real sector. Right fiscal policy support and collaborative dialogue with mutual outcomes is crucial to mitigate these impacts.”