The CBN showed yesterday, Tuesday, that monetary policy tightening is not forever. So, at the end of the two-day Monetary Policy Committee meeting, the members voted unanimously to raise the rate by just 25 basis points. Most analysts acknowledged there were still pressures on the regulator to tighten a little further, with some projecting a 50 basis-point increase. The margin of rate increase yesterday showed that, in flight parlance, the fall in interest rate increases has begun.

Those convinced of the need for a further interest hike hinged their argument on the resurgence of inflation in October, which saw inflation inch upwards to 33.88 per cent. The current levels both of inflation and interest rates cannot be allowed to subsist for too long. As we look forward to the new year, actions must be taken to reduce both rates.

While the desirability of both objectives is not in question, the challenge is the least-cost method for their realisation. Yet, it is clear that if the current level of hardship in the country must abate, then supply-side actions will take centre stage in economic policies in 2025. This year and the second half of 2023 have been devoted to demand management. This was designed to achieve some stability in the economy, but there is a limit that this cannot or should not exceed.

Some supporters of the continued rate hikes also hinged their argument on the need to offer investors strong enough incentives through positive interest rates. Such rates, they said, could only be guaranteed through higher nominal rates in the face of the rising inflation. Yet, a counterargument to that has been that it’s certainly not only positive real rates that attract investors. They also consider other variables, including safety.

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The narrative has to change in the coming year. Supply-side activities will be elevated over restrictions that limit the output of goods and services.  In practical terms, the government has to reflate the economy to boost production. Doing this would require that prices should come down so that individuals and households can begin to consume once more. The current tight policy stance has squeezed consumer spending and the economy cannot experience a boost without this change.

That change will begin with an alteration in policy conceptualisation. So far, it seems that the monetary authorities have chosen only the interest rate as their policy variable in the fight against price. That explains the massive hike in the rate. Yesterday’s increase was the seventh increase this year. In quantitative terms,  CBN has raised the rate by as much as 875 basis points. 

In simpler language, the central bank has raised its benchmark by a whopping 8.75 percentage points over what it was at the end of last year.  Its impact has reverberated throughout the economy. It has indeed made a significant impact on the cost of funds. It has altered how banks lend to their customers as well as how they lend to each other (inter-bank lending).

Therefore, reducing both interest and inflation rates must be taken together as a policy pack. Reducing inflation, as already said, would require increased production. In today’s Nigeria, that has a lot to do with the environment in which the production has to be done, right from the floor of the factory in the city to the road on which its vehicles will drive to distribute its products to its consumers. The farmers also face insecurity that keeps them away from the farms.

This takes us to the other significant event of this week: the release of the GDP figures on Monday by the National Bureau of Statistics. That report gave us a couple of things to cheer about, such as the 3.46 per cent growth recorded by the economy in the third quarter. That is the fastest growth recorded so far this year, from 2.98 per cent in the first quarter and 3.19 per cent in the second quarter.

However, we should be concerned about the poor (or not-so-obvious poor) performance of some sectors, even key sectors. If Nigeria is to achieve a lower price level next year, then food production must increase to reverse or at least reduce the current higher food inflation. However, NBS showed that agriculture experienced a decline in its performance.

According to the report, agriculture slowed to 1.14 per cent from 1.30 per cent in the same quarter a year earlier. This is hardly surprising given the current state of the agricultural sector. It is hamstrung by insecurity as farmers are not allowed in some places to go to their farms. It is also constrained by infrastructural deficit that hampers transportation of farm produce from the farms to the markets. There are other constraints, such as input shortages, to be addressed.

Therefore, as authorities refocus their attention on factors that will increase the size of the basket of goods and services that will be produced, Nigerians can look forward to a more conducive environment that accommodates both big and small players.