Why inflation defies MPR hikes

Headline inflation rose in September by 0.55 per cent in apparent defiance of the futile anti-inflation war by the Central Bank of Nigeria (CBN). CBN is tormenting the economy with gratuitous hike of the monetary policy rate (MPR) in a failed war against inflation.
The tacticians in the CBN anti-inflation war room had thumped their chest in perceived victory when the invisible hand depleting the naira’s purchasing power staged a precarious climb down in July and August. The CBN boasted that its tight grip on liquidity tamed inflation.
Everyone expected the apex bank to start a climb down on MPR when headline inflation declined in the two months. Ironically, the hike persisted.
The CBN claimed that the drop in inflation rates in July and August were the consequence of the astronomical MPR and banks’ cash reserve ratio (CRR) which now stands menacingly at 27.25 and 50 per cent, respectively.
Now that headline inflation has staged another upswing, one wonders what the CBN would offer as explanation for the upsurge.
The National Bureau of Statistics (NBS) is probably the most reliable agency when it comes to tracking the causes of inflation.
In its report last week explaining the recent surge in inflation rates, the NBS cited the recent 40 per cent hike in the pump price of petrol as the major cause of the recent spiral in headline inflation.
Transporters responded to the 40 per cent hike in the pump price of petrol with a 100 per cent increase in fares. That automatically hiked the cost of evacuating food items from Nigeria’s inaccessible rural farming communities to the markets in urban slums. NBS report shows that considerable hikes in the prices of bread, yam, gari, potatoes and sundry food items drove the recent upsurge in inflation.
That precisely is responsible for the recent surge in headline inflation. The NBS report maintained a deafening silence on the role of liquidity in the recent upsurge in inflation rates.
That is because Nigeria’s inflation is definitely not caused by excess liquidity as the CBN wants the world to believe. If excess liquidity was responsible for the surging inflation rates, one would have a situation where consumers go to the market with money in their pockets but could not find food items to buy.
The reverse is the case in Nigeria. The food items are everywhere but an odd combination of high transport cost and retailers’ profiteering posture along with the illegal levies of the greedy unions in the markets have priced the food items beyond the reach of Nigeria’s 140 million people toiling below poverty line.
The major war against inflation should be waged against profiteering retailers and greedy transporters who are prone to hiking prices and fares by 100 per cent at the slightest provocation.
If the federal government can control the behaviours of those two operators in the economy, the war against inflation would be won within weeks.
The recent upsurge in headline inflation has knocked the wind off the sail of CBN inflation warriors who have persistently blamed the nation’s spiraling inflation rates on excess liquidity.
In fact, the CBN has established an uncanny reputation for speaking from both sides of the mouth. Four months ago, data from the website of the apex bank showed that 93 per cent of the money in circulation in the economy was in private homes. Only a miserable seven per cent of money in circulation remained in banks’ vaults.
From all indications, the apex bank only controls the liquidity in banks’ vaults. The one in private homes is absolutely out of its control.
One therefore wonders why the apex bank would be tormenting the economy with MPR and CRR hikes when only seven per cent of the money in circulation is within its control.
The ultimate is that the CBN has been chasing shadows in its fight against inflation. It has raised banks CRR to a record 50 per cent in its futile attempt at stemming inflation.
With the recent hike in CRR, banks that mobilise N100 billion in deposits could only lend out N50 billion while the remaining N50 billion is tied down in the CBN vault.
The CBN’s tight grip on liquidity has only succeeded in worsening Nigeria’s alarming unemployment rate. Banks’ credit to the private sector has dropped from N76.5 trillion in the first half of 2023 to N73.2 trillion in the similar period of 2024.
Manufacturers and those operating mechanised farms can no longer raise loans to expand their businesses and create jobs because with MPR at 27.25 per cent, prime lending rates now hover around 32 per cent.
CBN’s mismanagement of the war against inflation has effectively crippled micro, small and medium enterprises (MSMEs), the sector of the economy that has the capacity to create more jobs than jumbo firms that access funds at prime lending rates.
With prime lending rates hovering around 32 per cent, MSMEs can only access funds at anything from 45 per cent. That is because banks rate them as high risk borrowers. Only banks can make profit by raising loans at that rate.
The ultimate in the CBN’s futile war against inflation is that it has extensively enriched banks while grossly impoverishing all other sectors of the economy.
The persistent hike in MPR empowers banks to manipulate their lending rates to profiteering proportions. Even as credit to the private sector is declining, banks’ interest incomes have risen tremendously. It rose from N2.8 trillion in the first half of 2023 to N5.9 trillion in a similar period of 2024.
That explains why other sectors of the economy are in sharp decline while banks are recording 13 digit profit before tax (PBT). Guarantee Trust Bank (GTB) leads the banking industry’s 2024 bumper PBT harvest. The bank’s PBT surged from a modest N327 billion in the first half of 2023 to N1.004 trillion in the first half of 2024. The CBN’s liquidity squeeze will worsen the economy if it fails to draw up fresh strategy for the war against inflation.