When the Central Bank of Nigeria’s Monetary Policy Committee (MPC) chose to maintain the Monetary Policy Rate (MPR) at 13.5 percent during its final meeting of 2019, many expected fireworks. Critics called for a rate hike to curb inflation, while others demanded a cut to stimulate lending and spur growth. Yetunde Adekoya, investment research analyst at Greenwich Research, in a conversation about the MPC’s decision, emphasised that the cautious stance was not only defensible but necessary.
Nigeria faces a classic economic dilemma: inflation is rising, yet growth remains fragile. As of October 2019, inflation had crept up to 11.61 percent, driven largely by food supply shocks and the closure of land borders. At the same time, GDP grew modestly to 2.25 percent in Q3, a figure far below the 6-7 percent needed to address unemployment and poverty.
Critics who demand aggressive tightening often overlook the consequences for an economy still clawing its way out of a prolonged slump. While raising rates in the name of price stability might cool inflation slightly, it would also throttle credit growth and choke the small and medium enterprises (SMEs) that form the backbone of Nigeria’s real economy. Conversely, cutting rates might stimulate spending but at the cost of higher inflation, currency volatility, and diminished investor confidence.
Adekoya believes the MPC’s decision to hold the MPR was a wise middle course.
Maintaining the MPR, alongside stable liquidity ratios, sends a clear signal to financial markets: stability matters. Both domestic and foreign investors crave predictability. By resisting pressure to take a reactionary stance, the MPC affirms its commitment to macroeconomic balance over short-term populism. This is particularly critical as Nigeria navigates global headwinds, from trade tensions to oil price volatility.
While inflation remains a serious concern, Adekoya emphasised that the root causes of current price increases are structural rather than monetary. For example, the spike in food inflation stems more from logistical breakdowns and policy bottlenecks, such as border closures, than from excess liquidity. Raising interest rates to address such inflation, she argues, would be akin to prescribing chemotherapy for a fever likely to do more harm than good.
Moreover, recent improvements in key financial indicators suggest that the current policy stance is yielding results. The Non-Performing Loan (NPL) ratio declined to 6.55 percent by October 2019. Loan-to-deposit ratios have improved, and commercial banks are responding to regulatory nudges by expanding credit to the real sector. A sudden rate hike would reverse these gains, making it harder for SMEs to access affordable credit.
SMEs are crucial to Nigeria’s economy. They employ over 80 per cent of the workforce and contribute nearly half of GDP. When monetary policy is too tight, SMEs are the first to feel the pinch, facing higher loan rates, reduced access to finance, and lower consumer demand. Holding the MPR steady supports these businesses by ensuring a more predictable borrowing environment.
Monetary policy alone cannot solve Nigeria’s economic challenges. The government must complement the MPC’s efforts with structural reforms such as fixing infrastructure, addressing insecurity, promoting export diversification, and ensuring fiscal discipline. However, as far as the MPC’s mandate is concerned, Adekoya suggests that price stability and sustainable growth are best achieved through the current approach.
In a country where economic policy is often driven by political expediency, the MPC’s decision to hold its ground stands as a refreshing demonstration of institutional maturity and long-term thinking. It contrasts with the more reactionary policies that sometimes dominate public discourse.
In the final analysis, Adekoya believes that the decision to maintain the MPR is not a sign of indecision or timidity but rather a deliberate bet on stability over shock therapy. In a country where economic volatility is constant, that is a bet worth making.
