The Nigeria Employers’ Consultative Association (NECA) has warned that the ongoing increase in the MPR could worsen the rising inflation unless the government tackles the foreign exchange (FX) crisis.
Speaking on the MPC decisions, Director General of NECA, Mr. Adewale-Smatt Oyerinde, insisted that, “The successive increase in the policy rate by the Committee will continue to hurt investment decisions in the private sector. The cost of borrowing for investment by organized businesses has increased since March 2024 when the policy rate was raised to 24.75 percent. The new policy rate of 26.25 percent will further affect private investment negatively.
“It is implausible to control the current high inflation by continuously raising interest rate. Implementing tight monetary policy stance when firms’ investment expenditure and household consumption is at the lowest ebb may further incapacitate production and capacity utilization in the already challenged private sector.
Given the triadic nature of relationship among interest rate, inflation rate and exchange rate, it will be most improbable to address inflation crisis by elevating policy rate, since exchange rate has continued to degenerate. The persistent high depreciation in the value of Naira will continue to feed inflation, while constraining firms’ investment and household consumption.
Consequently, raising policy rate will further exacerbate inflationary pressure as growths in factor costs and commodity prices become unbounded.
There is urgent need to nip the root cause of recent spike in inflation in the bud. The deferring inflationary pressure to the liberalization of FX in the country notwithstanding that the economy is heavily import dependent. Before the total floating FX regime was implemented, the economy was better-off with inflation anchoring below 20 percent mark. The government must reconsider the guided FX floating regime, which is a dynamic and flexible FX management regime and has proven to be better than the current regime.”
