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FINANCIAL MARKET: Dangers of over-tightening risks between SVB Lessons

The Monetary Policy Committee (MPC) raised the benchmark interest rate from its second meeting of the year by 50 basis points to 18%, making it the fifth highest in Africa. This was done in accordance with projections.

The benchmark interest rate in Nigeria is 18%, the same as in Malawi, and it follows the example set by Zimbabwe, Ghana, Sudan, and Sierra Leone, whose rates are 150, 28, 27, and 18.25 percent, respectively. As the MPC backed off its aggressive tightening stance, the nation moved into this position.

Since last year, the MPC has consistently raised interest rates to combat the inflation tide, resulting in a cumulative increase of 650 basis points. At the conclusion of its 290th meeting, it voted to maintain a contractionary monetary policy to control the inflationary trend.


Due to the ongoing debate over the removal of fuel subsidies, which is expected to happen by the end of the current administration’s term, and the ongoing scarcity of PMS, the committee predicted that price pressure would continue. The risks of financial contagion from the banking crises in the US and Switzerland, where Silver Valley Bank (SVB) and four other banks are currently affected and spreading, were also taken into account.

The MPC emphasized that it looked at the impact of further policy rate hikes on the stability of the banking system, despite CBN governor Godwin Emefiele’s assurance that there is currently no direct impact on the Nigerian banking industry.

Even though the key policy rate should be raised, albeit gradually, given the ongoing pressure on headline inflation, the committee made clear that it also considered the potential effects of further rate increases on the banking system’s stability in light of recent bank failures in the US and Switzerland.

The committee requested that the CBN strengthen its regulatory oversight of the banking system after concluding that further rate increases would not have a negative impact on the stability of the Nigerian banking system. This would help to ensure that the banking sector is resilient and stable.

Analysts believe that as already struggling businesses are further burdened by higher interest rates, further tightening could halt economic growth. Based on the CBN’s positive outlook for sustained expansion in the services and agricultural sectors, members of the MPC predict that Nigeria’s GDP will grow by about 3.03 percent.


The 50bps increase in the policy rate, which is being used as a tool to combat accelerating inflation, may slow growth and further reduce the total money supply, according to analysts at Cowry Assets Management, who are working to achieve sustainable economic growth and price stability.

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“However, rising inflation has persisted as a major concern in the majority of economies around the world, including Nigeria. It is intensifying price stability plans far from the control of the monetary authority—a trade-off in economic growth that may further motivate the central bank’s position for an extended contractionary stance.

According to analysts at Cowry Assets, “Similarly, we continue to see the downside risks of pressures from inflation as the central bank’s aggressive monetary policy tightening measures will largely depend on the path of inflation.”

In their analysis of the MPC’s decision, analysts at Cordros Research noted that the market’s expectations have changed significantly since the SVB’s failure, with the consensus pricing in a 25 basis point increase in the key policy rate at each of the policy meetings in March and May, after which the Fed is likely to take a hold stance at future meetings.

In addition, despite recent difficulties, we believe that if the US Fed abruptly stops raising the Fed rate to bring inflation back to the target, it will undermine the credibility of its forward guidance and cause inflation to rise. The aforementioned could lead to rates rising from what they are now. Therefore, we tend to favor the expectations of the current market.

“These expectations, in our opinion, will positively influence the CBN’s future monetary policy decisions. Despite the positive base effects, it is anticipated that consumer prices will remain sticky in the domestic economy. Additionally, the near-term growth outlook is still hampered by elevated downside risks that are made worse by the self-inflicted damage caused by the CBN’s Naira redesign drive and rising production costs.

“On balance, we believe the MPC is likely to maintain a slower rate hike at its next policy meeting given the approaching end of rate hikes by systemic global central banks amid sticky domestic inflation. In fact, the CBN governor stated during the post-MPC conference that continuing with an aggressive tightening poses a risk to the stability of the financial system. Accordingly, he declared that the MPC will move forward with a strategy of smaller rate increases to reduce the negative real returns while balancing the risks of over-tightening, as noted by analysts at Cordros Research.

Afrinvest West Africa analysts advised the CBN to reconsider its approach to the anchoring of inflation expectations, which served as justification for another interest rate increase.

According to them, financing conditions should be consistent with the overall goal of controlling monetary-induced inflation (however treasury bills rate have remained well below both the MPR and inflation rate). Furthermore, the bank’s policies, such as its cashless program, should be implemented to support its goal of price stability, while fiscal interventions and FG overdraft financing should be reviewed in light of the current situation.

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