The Labour Movement and the Organised Private Sector have expressed concerns over the recent hike in Nigeria’s interest rate to 27.50% by the Central Bank of Nigeria (CBN). The groups predict higher inflation and a weaker naira, citing the potential negative impacts on production, investment, and employment.
The CBN’s decision aims to combat inflation, which stood at 33.87% in October 2024. However, critics argue that this approach may not address the underlying causes of inflation, such as energy costs and exchange rate instability.
According to a senior official of the Nigeria Labour Congress (NLC), the MPR hike 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 stated.
The NLC official warned that this move could exacerbate production challenges, as manufacturers face higher costs of financing their operations. Nigeria’s inflation, largely driven by structural factors such as energy costs and exchange rate instability, may not significantly ease with a higher MPR.
The official 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 emphasized 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 emphasized.
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 prioritize affordable credit and improved infrastructure to reduce production costs.
The Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, also reacted to the development. “The Monetary Policy Committee’s continued hawkish stance has sparked concerns as Nigeria’s third-quarter GDP report highlights declining growth in critical sectors.”
Yusuf criticized 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.
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Yusuf canvassed 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.
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.”
Egbesola noted that 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.
He emphasized that 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,” Egbesola stated.
