CBN’s 22.75% interest rate hike raises concerns about growing non-performing loans – Experts

Concerns have been raised by several financial experts about the Central Bank of Nigeria’s (CBN) aggressive monetary policy approach, which has resulted in another 22.75% interest rate increase.

These specialists emphasized the possible negative consequences of the increased monetary policy rate (MPR) on current bank loans in an exclusive conversation with Nairametrics.

They noted that this would force banks to modify the rates at which they offer loans, which could exacerbate the amount of non-performing loans (NPLs) and strain financial stability metrics. 

The monetary policy rate (MPR), which was formerly 22.75%, had a significant increase of 400 basis points due to the recent implementation by the Central Bank of Nigeria.

Overtaking the previous rate of 18.75%, which had been in place since the most recent Monetary Policy Committee (MPC) meeting on July 24 and 25, 2023, this represents the highest MPR ever recorded in the nation. The increase of 400 basis points is the biggest increase in history.

Furthermore, the CBN maintained the 30% liquidity level while increasing the cash reserve ratio to 45%. 

Additionally, the Asymmetric Corridor was adjusted, raising the maximum and lower limits to +200 and -700, respectively.

As noted by Crane Securities Limited’s Managing Director, Mr. Mike Eze, rising interest rates could benefit the banking industry in the near run and provide windfall profits for certain institutions.

He did, however, issue a warning, stating that many companies would find it difficult to fulfill their loan obligations in the future, which might result in a rise in the number of non-performing loans.

Mr. Eze went into further detail about the Central Bank of Nigeria’s ongoing pledge to keep a tight monetary policy in order to fight inflation.

He did, however, voice doubts about this strategy’s ability to address the underlying causes of inflation in light of the many moving parts that contribute to its increase. 

He cited a number of reasons for inflation, including declining prices for importing energy supplies, currency depreciation, and food production being negatively impacted by insecurity.

He made it clear that even if raising interest rates is the CBN’s preferred method of combating inflation, it might not be sufficient to address the underlying problems that are causing inflationary pressures.

Eze warned that there may be lag effects before the detrimental effects of the current monetary policy become evident, meaning that the consequences might not be felt right away.

He issued a warning about the expected rise in non-performing loans, which may necessitate the use of interventions to control defaults. 

He underlined how critical it is to understand that the current approach could not be sufficient to manage the inflationary concerns, especially if the underlying reasons are not taken care of.

Jerking up the MPR by 400 basis points in one go is just overkill, according to Professor Uche Uwaleke, the Nigerian First Professor of Capital Market and Director of the Institute of Capital Market Studies at the Nasarawa State University Keffi.