How CBN Can Avoid Recession by Lowering Interest Rate, Expert Says

Agency ReporterJuly 25, 2023

2 minutes read

The Central Bank of Nigeria (CBN) is holding its Monetary Policy Committee (MPC) meeting on Monday and Tuesday, where it will decide on the key interest rate for the country.

The interest rate, also known as the Monetary Policy Rate (MPR), affects the cost of borrowing and lending in the economy.

The CBN has been raising the MPR since November 2022, from 18% to 18.5%, in an attempt to curb inflation, which reached 25.9% in June 2023.

However, a financial expert has warned that increasing the interest rate further could worsen the economic situation and push the country into recession.

Dr Basil Chukwu, a senior lecturer at the Department of Economics & Development Studies, Alex Ekwueme Federal University, Ndufu-Alike, Ebonyi State, told DAILY POST that the CBN should either maintain or reduce the MPR to stimulate the supply side of the economy.

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He explained that the removal of oil subsidies in the last two months has caused significant negative shocks to the economy, especially in food prices, transport and energy sectors.

He said that tightening the monetary policy to reduce inflation would depress aggregate demand and lead to lower output and employment.

“The CBN should either maintain the last rate or reduce it to stimulate the economy’s supply side.

“The removal of oil subsidies in the last two months has created significant negative economic shocks, especially in food prices, transport and energy sectors. Further tightening of the economy to halt rising prices (inflation) will depress aggregate demand and could lead to a deeper recession/depression. The reduction in the MPC rate will stimulate production, forcing down prices of goods and services”, he stated.

Chukwu added that lowering the interest rate would also encourage more investment and consumption, as well as reduce the debt burden of the government and businesses.

He urged the CBN to adopt a more expansionary monetary policy stance to support the recovery of the economy from the effects of the COVID-19 pandemic and other shocks.

The MPC meeting is expected to announce its decision on Tuesday afternoon. According to a survey by Bloomberg, most analysts expect the CBN to keep the MPR unchanged at 18.5%. However, some analysts have also predicted a possible hike or cut in the rate, depending on how the CBN weighs the trade-off between inflation and growth.